The economic benefits of war outweigh the costs. Discuss.

The economic benefits of war outweigh the costs. Discuss.

23rd August 2015 Ideas 0
By Hugh Lawrence, The Perse School

Worldwide, conflicts, all of varying severity and nature, have littered our past. It would seem that a common conception has arisen throughout society that war bears no economic benefits, perhaps due to the recent scars of atrocities conducted in the World Wars, such as the Holocaust and the use of atomic bombs. However, some may argue, I being one of them, that this is a serious misconception. Granted, war has many economic costs, this is inevitable; and will be born out of the destruction of land, labour and capital, but often it is overlooked that wars bring enormous mobilisation of resources, which regularly results in the development of new technologies and techniques that will benefit economically in the longer term. When regarding the statement “the economic benefits of war outweigh the costs”, a key question worth asking is: are we thinking in the long or the short-term? If we consider the short-term, I think many would have grounds to argue that wars costs severely outweigh its benefits. History has repeatedly shown this, from the Spanish Armada to the Falklands and Vietnam War. However, I would argue that the economic costs of war are often short lived yet the benefits derived from conflict will last for decades, maybe even centuries to come. But, do the long-term benefits outweigh the short-term costs?

The first aspect of the economic impacts worth considering is the cost to capital stock of a country, and as A.C.Pigou writes in his book “Burden of War and Future Generations” on Page 243, that “real costs of war to a country include two parts, the destruction wrought in it or in its possessions by the enemy and the resources devoted by the country itself to the conduct of the war.”. The glaringly obvious example to pick out is the First and Second World Wars, which, more so the second, left most of Europe’s land ravaged by war; from France to the Balkans and Russia. Whether countries’ lands were, themselves, directly affected by the wars or not, all were heavily impacted.

Some countries, like the USA, never truly experienced war on their own lands, unless of course you consider the attack on Pearl Harbour, 7th December 1941, whereas others, like France, were occupied for the majority of the war by Nazi forces. For countries like France and Poland, which were invaded on 1st September 1939 and 10th May 1940, respectively, a major cost of war was the destruction of capital stock and of labour. Large swathes of forestry and agricultural land, resources with a rich potential to make economic gains, were desolated by war machines. The Ardennes forest, for instance, covering roughly 11,200km2, was mutilated by war, and it was this destruction of natural resources which left many without livelihoods prior to war. Farmers were unable to cultivate land littered with craters, and the timber and minerals, from which major industrial cities like Liége and Namur had thrived, were deceased. In terms of labour, 1,050,298 of which were military dead, which is roughly approximately six million Polish citizens perished during World War II; only about one fifth of the pre-war population. These colossal losses meant that in pre-war periods productive capacity was far lower, and thus potential growth of these countries was severely limited. This said, in France estimates of war dead are roughly 550,000, a figure unlikely to do too much damage to pre-war production rates. However, if you compare Poland and France, two countries that were invaded during the war, with a country like the USA, the consequences of war are very different. The USA were the driving force of the Allied war effort, yet no civilians were killed directly by war, no land was ravaged by tanks and artillery and no towns or factories were flattened by bombers. Of course, the USA encountered military losses (roughly 407,000), but these losses were not enough to cripple pre-war production, especially considering the USA had a population of over 130,000,000. For the USA therefore, perhaps it could be argued there are far fewer economic costs of war, in this case, than for France and Poland, and this applies across many cases. Indeed, the same applies to the United Kingdom in the Second World War and the First World War, and it again applies in the Korean War. By 1953, the closing year of the Korean War, the USA’s real gross domestic product (GDP) per capita was $2353.51 whereas Korea’s was a mere $268.82. It must be said that these stats should be taken with a pinch of salt considering the USA was far more economically advanced than Korea by the 1950s, but still it outlines the enormous difference in the economic performance of a country that is not directly afflicted by war, i.e. the war is being fought on their lands, and one that is. Therefore, how large the economic cost of war is, in terms of destruction of land, labour and capital, will depend upon the nature of military activity of a nation; for some countries this economic cost of war will not apply, for others it will be one of the most significant costs of war.

All this said there are other economic costs, which often equally affect all countries involved in wars. These economic costs come in the form of damage to inflation, government finances and, of course, the balance of payments. The liberal economist James Galbraith wrote in 2004: “War causes inflation.”, and in that statement there is some truth, because as war takes place aggregate demand will skyrocket (as government expenditure, consumer spending and investment increases) causing the price levels to rise. Research into the Korean War discovered that not only did US inflation rise above 9% in 1950 but also “wholesale prices jumped 12% in the United States, 18% in Germany, 21% in Britain, 28% in France, and 32% in Sweden” (as suggested by Professor David Hackett Fischer in his book, “The Great Wave; Price Revolutions and the Rhythm of History”). A further example of war causing inflation is that of the French conflicts in Europe under the Directory’s rule in the late 1790s, just prior to being overturned by none other than Napoleon Bonaparte and the Consulate regime. Since its establishment on the 2nd of November 1795, the “paper currency originally traded at fifty francs to the gold franc, had sunk to 100,000” by October 1799, according to Paul Johnson in his book ‘Napoleon’. Inflation like this hits savings hard and can severely damage lover-class standard of living. However, inflation of this kind does not begin to compare to that of the 1923/4 hyperinflation in Weimar Germany, following the First World War and Franco- Belgian occupation of the Ruhr region, a major coal and timber producing region, and the Zimbabwean inflation of 2003-2009, following involvement in the Second Congo War, which saw inflation rates of 79.6bn per cent. The issues with this kind of inflation are well beyond damaging savings, but instead render the currency totally worthless and effectively cause the collapse of economies. This said, hyperinflation of this nature is rarely encountered. On the whole though it would seem that inflation is a major cost that is regularly encountered because of war.

Often though the main economic cost of involvement in war is the total distortion of government financing, with spending on new infrastructure, technologies, munitions and war machines regularly creating substantial government deficits. Even as far back as the 16th century is there evidence of this. It has been estimated by historians that the Spanish Armada, the fleet consisting of 130 vessels, cost roughly two thirds of the Spanish Empire’s revenue to build, yet it’s very first voyage in 1588 to England saw its destruction, leaving a gaping hole in Spanish finances. The War of 1812 offers a second example, when, according to L.Ohanian in his book “Macroeconomic Effects of War Finance”, 79% of US war financing was done through debt and seignorage in the conflict against the United Kingdom and her thirteen North American Colonies. Again, the First World War provides countless examples of government deficits created by war, with, for example, Italian national debt rising from 16bn lira in 1914 to 86bn lira by 1918 after spending an estimated (by Christopher Duggan and Martin Clark) 148bn lira over the course of the war. All of these examples, as well as the £3bn hole left in Britain’s defence budget following the Falklands War; show how war can severely damage government finances. Large deficits have many economic costs, such as bringing about rising taxation, opportunity cost to spending on merit goods, such as health services, and possibly a negative effect on the growth of private sector of the economy.

Government deficits are not the only kind of deficits affecting an economy though. The balance of payments/trade is another factor of the economy heavily impacted by war. Often there is a misconception that wars will always negatively impact countries’ balance of payments because excessive importing of goods and services, on both current and capital accounts, will be necessary in order to supplement the a country’s war effort. This may be true, but often people will overlook a key point, if one country is importing substantial amounts of goods and services, does that not mean another country will be exporting substantial amounts of goods and services? Yes, it does. Therefore, it is clear that impacts on balance of payments will vary to whether a country is an aggressor, a defender, or a non- belligerent/neutral nation. In terms of examples, it has proven difficult to find any hard facts and figures, but as one can imagine the Second World War provides, yet again, the best example. For Germany, the aggressor, the war badly impacted their balance of trade and they came out of the war with an almighty deficit, while for countries like Britain, the same occurred, as they had a small base of production and relied heavily on the USA to supply it with munitions, food, and financial aid (e.g. the Lend-lease Act of 1941). For the USA and USSR, they had an abundant supply of natural resources and so were not so heavily reliant on other countries for imports, yet were able to export to smaller countries in need of supplies, like Britain. Countries that were quickly overrun by the German blitzkrieg campaigns of 1939 and 1940, like Poland and France, also were (relatively) less impacted in terms of their balance of payments because, unlike Britain, the USA and the USSR, were not supplying an army with equipment or maintaining a war effort for more than a few months. Then comes the neutrals, countries like Sweden and Switzerland, which benefitted greatly from the war in terms of their balance of payments. Granted, trade did not run perfectly at times, but on the whole for neutrals trade increased, and surpluses began to develop as export earnings increased above import losses. Sweden for example, was Germany’s main supplier of iron ore, supplying roughly 9 million tonnes of iron a year throughout the war. Overall then, whether war creates economic costs or benefits through impacts on the balance of payments greatly varies depending on the military belligerency or non-belligerency of a nation, the size of a nation and the length of military activity.

From what has been written so far, it would seem that this is a pretty one sided argument, and that the statement “the economic benefits of war outweigh the costs” have been proven wrong. Therefore, let us consider the economic benefits derived from warfare and conflict.

Arguably the most significant economic benefit derived from wars is the technological advancements that they bring. War has often bought the necessity for rapid change and improvements, for instance in industrial mechanisation, agricultural practices and the field of medicine. One of the most important advances war has derived is in the medicinal field. World War One saw the first attempts at plastic surgery by Harold Gillies; World War Two saw the invention of penicillin and antibiotics; and, more recently, practices out in the field in the Iraq and Afghanistan Wars are being transferred into our local hospitals to ensure maximum efficiency. Last but not least, the Second World War proved the necessity for a National Health Service, which was later set up in 1948 under Clement Attlee’s Labour government. Economically speaking, the impact of these vast advances in medicine is simple; advances in medicine (and the establishment of free healthcare to British citizens) have meant significant positive externalities. Nowadays fewer and fewer people have to take time off work due to common illness, such as flu or influenza, and thus are able to make money when previously they would have been at home in bed. Healthier populations’ means more time spent making money in short.

It is not just in medicine where ground has been made. The aeroplane is another technological advancement made during war that has many economic benefits. Granted, the first automated plane ever built was in 1903, but surely it must be argued that the First World War severely hastened the progress being made within the aviation industry considering it was the first time aircraft were ever used on a large scale. To give an example of the frenzied pace at which advances were made, over the course of the war France produced roughly 68,000 aircraft, despite only fielding 140 planes in 1914. Nowadays air travel is taken for granted, but really it is an invaluable economic resource. Businessmen can fly across the world in less than a day in order to make transactions and deals; civilians can fly to exotic holiday destinations; food and other goods can be transferred around the globe in a matter of hours. Air travel enables businesses to expand worldwide, for tourism to thrive and for international trade to prosper, severely impacting nation’s economies through the balance of trade, inflation, employment, investment and government finances.

That said, technological advances can work in the opposite fashion. 1918 and the Battle of Cambrai saw the first use of tanks in world history, from which point onwards their potential as a useful tool in warfare was recognised and therefore developed. It could be argued that technological advancement in previous wars reduces the economic benefits to be gained from future conflict. In the case of the tank, its development through the First World War meant that by the Second World War they could create substantial damage. Tanks left large swathes of land across Europe decimated and killed hundreds of thousands, maybe even millions, of soldiers during the conflict, meaning that potential future growth was stunted more considerably than would have been otherwise. Tanks are not just the only example of this; the same applies to the development of the atomic bomb during World War Two and their deployment in the Asian theatre of war at Hiroshima and Nagasaki in 1945. The development of such brutal and destructive weapons in previous warfare means that in future wars, if used, there will be far more economic costs and fewer economic benefits to be drawn from war.

Speaking of technological advancements, industrialisation is an aspect of war which has bought economic benefits, especially in the last century. Conflicts this century may be limited in this field because the majority of countries around the world are fairly well industrialised as it is. However, wars like the Crimean War, Boer Wars, the First World War, the Second World War, the Korean War, and the Vietnam War have helped to boost gross domestic product/gross national product (GDP/GNPs) worldwide. Examples of boosted GDP growth are evident in many countries during war, for example, in the UK during the Crimean War (1854-1856), GDP rose from an annual growth rate of 2.83% in 1853 to 4.73% by 1856, according to Bank of England statistics. The same occurred in the Boer War of 1880-1881 when, despite losing to the Boers, British GDP rose from -2.21% in 1879 to 7.86% in 1880. The Second World War further outlines the point, with the US annual growth rate of GDP rose from 8% in 1939 to 18.9% by 1942. It is not just in major powers who saw their countries GDP rise during war, Sweden, which remained neutral during both the First and Second World War, saw GDP rise from -9.3% in 1939-1940 to 11.3% by 1945-1946. These figures clearly demonstrate how war has a positive impact on GDP worldwide, whether nations were directly involved in the war or not. However, whether these economic benefits lasted or not beyond war is a different question. It would seem that often countries often cannot maintain wartime levels of production and so see a slump following conflicts, like that of the 1919 post-war recession in which UK annual growth of GDP dropped from 2.15% in 1918 to -9.9% in 1919, -7.78% in 1920 and then -10.25% in 1921 (again according to Bank of England data). As a result, it would seem that the argument of rising GDP being an economic benefit of war can be counter-argued by viewing what happens to GDP in the years after conflicts occur; it will just depend whether you are looking solely at the wartime period itself or whether you are including the post-war years as to which judgement you may make.

One key benefit of war is often only recognised many years after the war itself. Wars regularly aid in binding a nation together, even sometimes throughout defeat, as all members of society begin to suffer and have to endure the same hardships. One may ask: how does this have an economic impact? Consider the Falklands War of April-June 1982, in which British military forces were rapidly mobilised and sent across the Atlantic Ocean to recapture the small territory off the coast of Argentina, which was labelled as “the turning point in Mrs Thatcher’s premiership, indeed in her political career” by Simon Jenkins, writing for the Guardian in April 2013. In 1981, support for Margaret Thatcher has severely dwindled, and indeed, her government seemed on the brink of collapse, but the sudden victory for Britain in the Falklands “changed everything” and support for Thatcher swelled. This binding of the nations behind Mrs Thatcher meant she was able to confront the miners, crush left-wing local governments and “most crucial of all, the patrician Tory moderates were diluted and eventually driven from power”. As a result of victory in war, Thatcher took control of her government and applied her powers with GDP rising from roughly -1.5% in 1981 to 4-5% by the close 1983, a figure higher than the average British growth rates. Furthermore, inflation fell from the disastrous figure of roughly 12.5% in 1981 to just below 5% by 1983. The 1984 Miners Strike showed how the Falklands War of 1982 enabled Thatcher to “[come] into her own” and begin the closure of an industry which had long been in decline (since the 1920s) and was proved to be extremely uneconomical, mainly due to foreign competition. Examples like that of Thatcher and the United Kingdom are mirrored by countries like the USA in their wars of independence, Russia in the First World War with the consequential Bolshevik Revolution of 1917 and South Africa following the Boer War, all of which bought economic progress following conflict. The economic consequences of conflict in the likes of Iraq and Afghanistan are yet to become visible, but perhaps in the next decade it will become clear whether the wars waged in both countries have enabled the Iraqi and Afghan governments to take control of their countries and progress economically.

Other economic benefits involve employment and the labour force. As stated in the previous paragraph, often wars will necessitate the mobilisation of all resources to the war effort, and this will include the labour force. Men will be required to fight and work in the mines, women will be required to work the land and in factories. Often will be the case that due to war unemployment will be significantly reduced, a macroeconomic goal.

 

For instance, the diagram above exemplifies how during the Second World War unemployment fell from around 15% of the population in 1940 to almost 0% in 1944. Furthermore, Mark Harrison, in his book “Resource Mobilization for World War II: The USA, UK, USSR, and Germany, 1938-1945”, estimated that from 1939 to 1943 the UK and USSR increased the percentage of the total workforce involved in war-related jobs from 18.6% to 45.3% and 14% to 54%, respectively. This demonstrates how war bought about the “mobilization of the workforce”, as Harrison labelled it. This said, not all wars may contribute to a large reduction in unemployment. Perhaps the Second World War is a slight anomaly in that it is such a huge conflict that required mass-mobilisation. Other, smaller conflicts between nations may have a far smaller impact on unemployment. Yet I do still feel the general theory applies; that war will bring a reduction in unemployment, it will just vary depending on the scale of the war.

Linked to unemployment and the labour force, it could also be debated that war has bought a more equal society. The use of black regiments, such as the Harlem Hellfighters in World War One, and women as nurses and factory workers during more recent conflicts may perhaps have quickened the pace at which they gained an equal footing in society to the white man. As a result, the labour force of most nations has been widely expanded and has also meant that the potential productivity and therefore growth of countries has increased. However, this is a much less influential factor than others and perhaps does not carry such weight in its argument to show that the economic benefits of war outweigh its costs alone.

So far, the main focus has been on global wars and relatively large-scale conflicts. However, how do the economic costs and benefits compare and contrast between global warfare and civil wars? Will civil wars not see far less economic benefits than global wars? If you glance back at what has previously been written it would seem that countries that have been invaded and conquered encounter many more costs than aggressors/invaders and often will experience the economic benefits of war. Countries in which wars are waged cannot maintain such high levels of production and maintain levels of GDP because both capital and human stock are lost, like the USSR in World War Two where, according to Mark Harrison, 43-44% of their assets (human and physical) were destroyed by the war. So surely in a civil war the same applies, if not to a more devastating affect than in global wars, because no nation really benefits. For example, the Iranian Revolution of 1979 was a civil war that bought the world economy to an abrupt stop following a severe energy crisis. With large swathes of the Iranian population not working, worldwide oil supplies dropped by ~4%, resulting a rise in prices by $39.50 per barrel over a 12 month. Furthermore, inflation around the world exceeded average rates, like in the USA where inflation 13.3% compared to its average 11.2%. For Iran itself, little benefit was made, with, as suggested would be the case by Paul Collier in his book “On the Economic Consequences of Civil War”, the war “damage[d] the economy through the destruction of some resources. For example, part of the labour force is killed or maimed and bridges are blown up”, “diversion of public expenditure from output-enhancing activities”. Meanwhile and saw the unemployment remained unchanged, GDP plummeted rather than rose (from 16.9% annual growth in 1976 to -3% by 1981 after hitting -12.6% in 1980), and there were no significant technological advances,. Furthermore, inflation, balance of payments, and government finances were hit badly. In reality, the only economic benefit that Iran took from the civil war is similar to the kind that Thatcher made following the Falklands engagement. The Islamic Republic was joined in 1979 and since then Iran’s economy has flourished. GDP has increased from $114 billion in 1980 to $858 billion in 2010 with GDP per capita improving substantially, from $2974 in 1980 to $11,396 by 2010. Furthermore, in 2010, less than 10% of Iranian GDP was dependent on oil and gas, comparing to above 90% before Iran joined the Islamic Republic. More recently, civil wars seem to be becoming increasingly common, with conflicts in Iraq, Mali, Libya, Syria, and the Ukraine. Obviously it is difficult to yet judge what the economic impacts of such conflicts will be, but arguably they will not be much different to those of the Iranian revolution of 1979. Overall though, it would seem that the economic costs are greater than the economic benefits in the short term, but in the long term perhaps the economic progress being made will outweigh the negatives during the war itself. On the other hand, it is worth keeping in mind that not all civil wars will lead to progress, it could be argued the Spanish Civil War of 1936-1939 has not produced the same sort of economic progress visible in Iran as the economy has now slipped into a deep recession.

Perhaps it is also worth considering another variation of warfare, which is becoming a less common occurrence: do the economic consequences vary if the war involves a well developed country invading a less developed nation? In my opinion, yes. Take, for example, British colonisation of Africa in the late 19th and early 20th century, in particular Kenya, then known as British East Africa. The first point to lay out is that, because of the difference in levels of development, often conflicts between invaders and defenders will be relatively short, often spanning no more than a year in the case of British colonisation of Africa, which means that there is less damage to capital stock and natural resources than other wars. Due to the conflicts abrupt nature there was little effect either on the balance of payments, government finances or inflation. British rule over Kenya began in 1885 and has since bought a vast sum of economic benefits. Kenya saw a swift transition in its technology, with the introduction of railway and a massive coffee industry, with roughly 700,000 growers, reducing unemployment. New medicines and infrastructure flooded into the country, as well as improved organisation at the top political level. Nowadays, Kenya has one of the largest GDP’s in Africa, worth $17.39bn (US), and still receives 50% of foreign investment into manufacturing from the UK. It is very clear that without British rule over Kenya in the late 1800s lasting through until 1964, the country would not been in the state it is now and would be extremely unlikely to have developed as much as it has without being ruled by a more developed power. This is just one example, all African nations were once ruled by major European powers, as was much of the Caribbean and Asia, and the example of Kenya can be seen reflected in them. In this case therefore, it seems certain that the economic benefits of war outweigh its costs.

In conclusion, it would seem that to make any stonewall judgement that the economic benefits of war outweigh its costs would not only be unwise, but also probably wrong. This is because of the vast variations of warfare throughout history, which therefore means that the consequences of war are seldom identical. There are so many different variables to consider, for instance the development of a country, the political stability of a government, the military stance of a nation, the size of the war and whether the war is a global conflict, a civil war or a more developed country invading a lesser one. Some conflicts will involve more economic costs than benefits and vice versa, but it will depend on the wars nature. A global war, like the First and Second World Wars, will see both victors and losers. Some nations losing large amounts of land, labour and capital (like the USSR), encountering high inflation, compiling large national debts and creating significant deficits on both the capital and current accounts of their balance of payments; whilst others experience impressive increases in GDP, development of new technologies, low unemployment, equality and the promise of future economic progress. Whereas, in civil wars there are rarely any victors, with the only economic benefit being the possibility of future economic progress, but even then, that is not always the case, as shown by the Spanish Civil War. However, all this said, it would seem that on the whole, the economic costs of war are often short-term issues which are relatively short lived, whilst the economic benefits of war, or at least the more meaningful and influential benefits, have longer lasting impacts on the world economies. As to which is more important, short-term costs or long-term benefits, I would have to say the latter. In my own opinion I would argue that short-term sacrifices are worth being made in order to make the long-term benefits that our current economies are surviving off now. It is on this note that I feel is an appropriate ending point; that overall, the “[long-term] economic benefits of war outweigh the [short-term] costs”.

About the author

Andrew Tan: Head of Technology and Website Development. 2nd year Economist at St. John's College. Please e-mail me with any inquiries/issues regarding the website at itofficer@marshallsociety.com!

0 Comments

Would you like to share your thoughts?

Your email address will not be published. Required fields are marked *

Leave a Reply