Economics of War

Foreign markets are dependent upon trade alliances and peace between countries. So what happens to
economics during times of war? Before the times of treaties and trades, enemy tribes were able to
engage in what is known as “total war,” which is pretty much exactly what it sounds like: two groups
of people settling their disagreements with violence. Then came the idea that under a democracy, total
peace could be achieved because then the citizens wouldn’t be at war with themselves. However,
what wasn’t taken into consideration was the rise of socialism, which ended up further dividing
groups of people making them more susceptible to war. But that’s getting into politics.
In emergency situations such as war, the government essentially takes control of production and
allocates resources that would normally go into consumer goods to making a variety of products for
the military. With increased government spending comes higher taxes, which means the citizens have
less purchasing power and end up losing more money to government taxes.

However, in World War II, the rise of unions shielded the laborers from pay cuts making the
government reluctant to raise taxes, and so they had to intervene in the market to ensure an adequate
flow of resources into the war efforts. At the end of the day, a war is one because one country has
access to better and more efficient resources than the other. However, war and economy do not go
together as the economy of any country needs cooperation to succeed.
“If a tailor and baker go to war with each other, it is significant that the baker can wait longer for a
new suit than the tailor can go without bread.” This quote by Robert P. Murphy in his article “The
Economics of War” explains the fact that eventually one country is going to realize that they cannot
survive without a certain product from the country they are at war with, forcing them to find ways
around it. In the case of the Germans, they decided to try and create their own substitute goods to
maintain their maritime supply lines, but it turned out the product was extremely inferior.

impact-of-war
The economic impact of war on a country can be catastrophic. In many cases, war often leads to
inflation, which can end up toppling the economic backbone of a country. During the Civil War, the
Confederacy started printing money to pay their soldiers which caused the value of their currency to
decline.

There also tends to be a high amount of national debt after wars. After the first and second world
wars, the UK’s national debt rose sharply. The UK was able to pay it off with the help of loans from
the US, but often that causes a vicious cycle of borrowing money from country A to pay back country
B and so on.
uk-debt-100-years
Civil Wars specifically have a devastating impact on the economic development of countries because
they are quite literally tearing themselves apart. Countries going through Civil Wars often see a
collapse in tourism, foreign investment, and domestic investment. During the Civil War in the
Democratic Republic of Congo, the cost of war was equal to the amount of international aid. The war
cost over 9 billion euros, which was 20% of the country’s GDP. Below is the graph of the GDP loss
in Burundi after their Civil War.

loss-of-gpd
Along with these substantial costs, war also results in a great opportunity cost. If the government
allocates about 3 billion dollars towards the military during a time of war, that’s 3 billion dollars that
could have gone towards education or healthcare.

Despite all these negatives, it is worth mentioning the temporary benefits that war can have on a
country’s economy, such as full employment, increased rate of innovation in military grade
technology, and changes in social attitudes (women entering the labor market during the first world
war). War is definitely still a time for innovation, even though millions of lives are lost in the process.

Bottom line is that even though there are few economic benefits to warfare, the economic and
psychological costs are much, much higher.

Sources:


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