Economics Essays on Relationship between War, Uncertainty and the Economy
Historically, war has been and continues being one of the costliest endeavors for government, citizens and states. Apart from countless lives being lost in war, many countries have been left bleeding economically too. This is because it leaves a country in deficits and national debts. War however attracts mixed feelings and reactions because; some people feel that war benefits some governments’ economies and brings advancement in humanity in one way or the other. While some people suggest that war is the cause for recession, others argue it is a source of military spending hence a major cause in rapid economic growth. This argument is based on the fact that the meaning of a recession is most of the time misunderstood. A recession is a period associated with negative economic growth and not the assumed meaning of recession being rising unemployment due to falling outputs. Even though some arguments look at war as a boost to economy, there is need to consider that the war might only benefit economies based on first world countries which are already rich. This could also benefit countries which initiated the war but it might not be of any benefit to economies of third world countries. Both arguments show that there is a relationship between war, uncertainty and the economy be it a negative or positive impact. I believe that the outcomes of war have major negative impacts regardless of common arguments of its benefits.
Recent polls in public opinion in the US show a large number of citizens supporting the belief that war promotes military spending which in turn improves economy. This would be a total contrast with the public knowledge and understanding that war costs human life. Military spending during wars truly creates employment and additional economic activity by increasing demand (Rockoff 122), but at a cost. It also contributes to advancement of new technologies which could be filtered to other industries like the radio industry during the world wars. This is usually funded by a combination of government borrowing and tax though more weight lies on borrowing. This however, could be argued by the fact that programs targeted specifically at creating employment or accelerating R&D could have the same effect even though at a lower cost. An economy with excess capacity and unemployment could benefit from an increased military spending thus providing an important stimulus. However, the in presence of budget constraints like currently in the US, increased military spending could displace other non-military outlays which could be as important. Such outlays include education, infrastructure, and investment in industries dealing in high-tech. This could affect service delivery or development of infrastructure which would later have long term effects on growth rates.
War holds both direct and indirect effects to a state in terms of infrastructure, economy, and political instability. Direct cost of war includes factors such as, military costs connected to the government, damage costs to physical and social infrastructure, damage on lands and capital assets, and many more. It also affects the cost of providing and catering for the displaced and disabled during the war which increases chances of poverty for individuals and a nation at large. Indirect costs also include various factors such as lost capital as a result of loss of human capital due to death, domestic and foreign investments suffering, and loss of income due to reduced tourism. Tourism proves to be one of the most affected sectors that allow governments a source of capital (Rockoff 123). Tourism accounts for a big part of a nation’s capital meaning that war would be a problem regardless of whether or not they benefited from the war. In the long run, military spending could be a factor that decreases government investment. This shows that military expenditure could impact the growth of an economy even though it might not happen directly. There is always an indirect delayed negative impact of expenditures on economy growth.
Once all tokens are cast, conventional wisdom holds it that military expenditure is bound to stimulate state economies. This is an idea supposed from facts accumulated during World War 2 (MacEwan and Miller 37). America emerged from this war as a victorious buttress among the European nations and Russia. The war created a dire demand for tanks, and armaments making the economy to run at a full boom where everyone in need of a job got one. The job market was highly saturated such that there was demand for people who could work two shifts. During this period, growth was clearly driven by military spending which was accompanied by a decrease in consumption and investment which was not the case during the pre-war period. The war was primarily funded through debts and taxation which had increased around 5 and 6 times respectively during the course of the war. Unemployment obviously reduced due to the demand of manpower. This caused a decrease in consumption
Consumption was managed through rationing and price controls. It became almost impossible for households to buy goods such as water heaters, irons, and washing machines. This is because the raw materials and resources needed to produce such goods were focused in the war effort. Scarce resources and production capabilities were assigned as priority to the production of military goods. By the end of the war, distribution of wealth was one of the positive and lasting effects of war. The reallocation of income was a key contributor to the ideal conditions that led to the formation of a consumer economy that could be considered as advanced. During the years of war, income declined drastically and stayed stagnant till the 1970s and afterwards climbed from 33% of stagnation to 45% in 2007. This shows that the war played a dominant role regarding income concentration within the United States (MacEwan and Miller 37).
The economic benefit of a country during war would however, be dependent on several factors. The country does not automatically gain from war despite common assumption associated with employment opportunities. Prior to war, a country should have a low economic growth and minimum use of resources in order to maximize in terms of economy after the war ((MacEwan and Miller 37). Large and sustained government expenditures also ensure investments during the war and the outcome could be beneficial. Also, if the war is financed properly, when it is not local, and is of minimal time, it could be economically empowering to any state. These are some of the factors that helped the United States emerge with economic benefits as compared to the European economy which turned out to be of negative impacts. This shows that war also could have negative impacts if not properly funded and planned. As if loss of life is not enough to affect capital income, a state could be left in debt that would affect it for a long period to come.
The Economic Growth Theory states that war would be expected to affect economies in different ways such as depleting human capital, and also physical capital stock (Sherman et.al 331). It could also increase or slow development in terms of technology and could also be responsible for strengthening or weakening institutions which existed pre-war such as education. This clearly shows that after a war, political uncertainty holds the capacity to increase perceived risk and at the same time, decrease expected returns which might lead to shorter investment horizons. This could reduce investments while raising the capital cost which might prove to be dangerous to an economy. After the world wars 1 and 2, the United States emerged with a change in the technological landscape and productive capacity which rose astonishingly with the technological advancement boom (MacEwan and Miller 38). European countries like Germany and France were however greatly devastated by the war such that they had no option but to cooperate with the United States in terms of industrial development and free flow of trade. This was considered as the quickest way towards recovery for these nations.
Like any other form of government spending, military spending could be an essential source of expanding economic demand during low confidence and downturn times. This is because; it could lead to development of new industries, technologies, and generate new sources of demand and employment (Hess 313). If funded by progressive taxation like the United States during World War 2, it could lead to an outcome of efficient income distribution indirectly. After 1495, flattening of income distribution helped to facilitate the creation of a middle class that was consumer oriented. This could be considered the foundation for the economic post war boom that described the United States political and economic pre-eminence.
However, the war also caused a decline in consumption and investment due to the structural changes that were relevant in focusing the market on the war effort. Governments fund war debt or taxation whereby taxpayers are normally burdened while the private sector investment and consumption remained strained. Other negative effects include factors such as higher taxes, budget deficits, and growth above trend line which leads to inflation pressure (MacEwan and Miller 39). Regardless of the funding and the planning of a war, I believe that the overall macroeconomic effect concerning economy remains negative. Recovering from a war for the future of an economy might be hard. As much as employment increases, taxes are also increased to cater for the expenses used in resource acquisition and military gear production.
Loss of lives also leads to reduced labor which affects the overall capital of the state. This therefore, means that the government could be creating jobs for personal that might not be available. Also, during war goods and services tend to be expensive for the ordinary citizens. This is a factor that might not be considered by governments because they are already gaining at the top. War leaves countries with deficit and debts which shows that the employment opportunities also help the government in repayment rather than citizens (Sherman et.al 214). The benefits or loss of wars are also dependent on whether or not it achieved its purpose. The purpose of a conflict is to provide security for citizens in any nation. This is why countries like Germany suffered in terms of economy (Sherman et.al 216). The outcomes of the war were not friendly in the European countries because they did not fulfill the sole purpose of providing security. Because of this, some countries go to war even when it is not necessary in an effort to improve economy.
War also tends to favor economies of countries that are already rich. This means that third world countries like Somali caught up in war would not benefit from the war economically. Such countries lack funding during war and end up borrowing capital to cater for the war due to limited resources. Chances of a successful economy like the one reflected by the United States after the World War 2 are minimal (MacEwan and Miller 37). This therefore; shows that economic benefits or loss in any give country during a war is relative. As seen earlier, it depends on very many factors and not many states or governments would be able to live up to them.
In conclusion, wars the paper shows that war could be of benefit or loss to an economy. However, I feel that the negative effects of war on any economy outweigh the benefits. Statistics speak mostly vouch for the benefits that the United States gained from different wars forgetting that the US government is heavily funded hence a rich nation. All factors put together, a war strains human capital, infrastructure development, education, taxation, tourism, and private investments. These are all factors that affect the economy of any given state. Even though it could be an important tool in technology development and creation of employment, other fields such as investment development exposed. With this, the economy of a country could fall apart as fast as it was built on the foundation of war.
Hess, Peter,N. Economic Growth and Sustainable Development. Routledge. 2013
MacEwan, Arthur and Miller, John, A. Economic Collapse, Economic Change: Getting to the Roots of the Crisis. Routledge. 2011
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Rockoff, H. (2012). America’s economic way of war: War and the US economy from the Spanish-American War to the first Gulf War. Cambridge: Cambridge University Press.
Bottom of Form
Sherman, J, Howard, Hunt, E.K, Nesiba , Reynolds, O’Hara, Philip and Wiens-Tuers, Barbara. Economics: An Introduction to Traditional and Progressive Views. Routledge. 2015
Sherman, Howard J, and Michael Meeropol. Principles of Macroeconomics: Activist Vs. Austerity Policies. , 2013. Print.