EFFECTS OF WAR ON THE ECONOMY

Effects of war on the economy

Effects of war on the economy

Introduction

The most persistent and perhaps most important question relating to the effects of America's wars and their related costs on the economy is whether military expenditures have been a prop or a burden for economic growth. This question has continued relevance because the United States in the 1990s spent a larger part of its gross domestic product (GDP) on defense (3.8% in 1995) than any other G7 industrial nation, almost four times Japan's expenditure and nearly twice as much as Germany's—America's two most important economic competitors. The fact that Russia in the 1990s spent almost three times more of its GDP on defense—and was in economic chaos—only strengthened this concern. (Kennedy 2006)

Discussion

Historians and economists have waxed and waned with regard to the effect of military expenditures on the economy. Charles and Mary Beard in The Rise of American Civilization (1927) and Louis Hacker in The Triumph of American Capitalism (1940) argued that the Civil War destroyed not only slavery but also the Southern slaveocracy, thus allowing the balance of political power to shift to Northern industrialists and hence spurring American economic growth. Prior to these accounts, the classical economists (Adam Smith, David Ricardo, and Thomas Malthus) were concerned with the effects of war on aggregate demand. The eighteenth and early nineteenth centuries saw very high levels of military expenditures in Britain, for example, which these economists believed had a negative impact on industrial growth. The national debts resulting from war, Smith believed, “enfeebled every state … enriching in most cases the idle and profuse debtor at the expense of the industrious and frugal creditor.” (Kennedy 2006)

A major flaw in the above argument is referred to by economists as "The Broken Window Fallacy". According to Henry Hazlitt in his book, Economics In One Lesson, "The Broken Window Fallacy" goes as follows:

A young hoodlum throws a brick through the window of a small store. The storekeeper has to replace the window so he contracts with a local glass shop who for $250.00 does the job. To many who observed this exchange, it was concluded that the broken window produced positive benefits-the $250.00 income of the glass shop. (Hacker 2005) They surmised that the hoodlum had in fact done a service to society...he boosted the economy.

Whereas, it is true that there were some who benefited from the broken window, what was overlooked was it's negative impact. The shopkeeper had to replace what he already had... a perfectly good window. He had to take $250.00 that he might have saved, invested or spent on something else and replace the window. So instead of having a window and $250.00, he now only has a window. Wealth has been destroyed, not created.... thus a decline in the economy.

Correlated to the relationship between war and the economy of a society, "The Broken Window Fallacy" implies that while increased spending on preparing for war may appear to help the economy, what we often fail ...