Wars and the Economy

Page Summary

Wars and the Economy

 

Opinions and Evidence - Contrary to popular opinion, wars are generally NOT good for the economy. They do, however, have important effects on economic institutions, and therefore, on the long-run performance of the economy.

Outline

  1. There are four methods of financing wars; each has different advantages and disadvantages, but all move resources from the private to the public sector

    1. Printing or creating money

    2. Confiscation - drafting soldiers and other resources

    3. Taxation

    4. Borrowing from the public

  2. Theories of the "stimulus" effect of war overlook very real costs imposed on economy

    1. Major cost of war borne by soldiers

    2. Mobilization imposes costs on civilian population, as well

    3. Ideological legacy of war has been acceptance of increased government control of the economy

    4. Each of the major wars produced decline in American economic well-being

    5. Each war brought benefits to some Americans but there is no way to compare wars' benefits and costs to all

  3. Each of the major conflicts in U.S. history had important effects on our economic institutions

    1. The American Revolution caused significant economic hardship
      1. British naval blockade disrupted foreign trade
      2. Exports and imports fell
      3. Investors turned to manufacturing instead of commerce, leading to great losses when trade reopened after the war
      4. Economic conditions were made worse by runaway inflation, caused by government's efforts to finance the war

    2. The economic strain of the Civil War was greater in the South than the North, but was extremely high even in North
      1. The North began the war with financial panic and suspension of specie payments
      2. The South was poorly prepared for war and didn't adjust as necessary

    3. World War I caused major changes in the economy of the U.S.
      1. Neutrality was profitable for some U.S. firms
      2. Changed from debtor to creditor nation and the financial capital of world
      3. War finance resulted in significant inflation
      4. Centralization led to hidden price increases and disruption of allocation
      5. The problems of the War Industries board and "priorities inflation" reinforce the lesson that the market allocates best
      6. Labor changes lead to discrimination and unrest
      7. The legacy of W.W.I was both financial and ideological

    4. Major difference between W.W.I and W.W.II was in the excess capacity at time of mobilization
      1. More reliance on taxation but money created to spur bond sales created inflationary pressure
      2. The bold plan of mobilization resulted in major reallocation of resources
      3. The human costs of W.W.II was more than five times that of W.W.I
      4. Fear of strikes led to expanded government power and wage and price hikes
      5. Demand for labor initiated significant change in role of women in society
      6. Demobilization didn't produce the depression similar to that which followed W.W.I

    5. The Cold War, too, resulted in economic disruptions
      1. Korean War witnessed the imposition of price controls
      2. Vietnam war had less impact because it was small relative to the size of the economy
      3. Cold War consumed 7.5% of GNP between 1948 and 1989 and created major changes in the industrial sector

Connections to Economics

Rules of the Game - Why do government take greater control of the economy in wartime? Why do citizens accept (or resist) this control?

Trade-offs - When resources are used to make war or to support war efforts, what alternative outputs are necessarily sacrificed? Is it possible to use resources for war without sacrificing anything of value?

Incentives - Who (individuals or groups) gains in a wartime economy? What is the impact of war on profits and wages? Do government officials gain or lose in a wartime economy? Who are the losers in a wartime economy and how do they react to their losses?

The Economic Way of Thinking - Government expenditures are not measures of net addition to total output.

Economic Concepts that support the historical analysis:

inflation
fiscal and monetary policy
taxation
opportunity cost
command economy
government spending
rationing
money supply
trade-off