The Myth that Won’t Die: “War is Good for the Economy”

"War has no positive effects."

By Carlos Boix, Mises Institute

War is the ultimate government intervention. It is the excuse for all kinds of evils to be imposed on the governed. From confiscation through taxes and inflation to restriction of freedom of speech and the redirection and even nationalization of whole industries, nothing increases state power such as war.

As the state is predatory and produces nothing of use, it is the ultimate impoverishing situation. From an ideological point of view, it is even worse, mixing love for one’s culture and homeland with the state itself. It reduces individual’s resistance to loss of liberty and creates in their minds the myth of the protecting government.

There is also another insidious idea that a lot of people hold: That is that war has economic and other benefits, not to certain individuals or groups, but to the community at large. It is worth examining these supposed benefits to show that no, war does not benefit the community, it is just death and destruction.

Economic Stimulus

As with all government stimulus, this is just a redirection of resources. Instead of adapting to current resources, what a war stimulus does is to increase money and credit at unprecedented levels to pay for exorbitant government spending. This just means that real resources are taken from the community in the form of inflation and taxes and spent away on things the community does not want.

It is similar to getting all your savings and any credit you can get and spending it. For a while it appears that you are more affluent, until those resources are spent. Fiscal stimulus causes the same waste of savings and capital which, for a while, look to have stimulated the economy. But this is just spending. Soon there are not enough resources left and reality asserts itself. Once enough resources have been wasted, there are not enough to sustain the party, no matter how much money the government prints. If it continues to print, they create a hyperinflation period. If they stop, we get a recession.

The way the stimulus is done is also important. As it is done through banking credit, the temporal analysis of entrepreneurs is completely altered. A decrease in interest rates makes it look as if there are more resources saved. The problem is that the way entrepreneurs experience this is generally with an increase in demand. Those who do not respond—seeing it as unsustainable—will struggle to meet demand and will lose clients to other businesses and will still be hit hard in the downturn. Hence, most entrepreneurs will have to ride the wave and try to adapt when the crash comes.

This situation does not increase resources or make the community better off, it will waste resources and impede sustainable improvement. Overall, the community will be poorer afterwards. The idea that this kind of stimulus is positive is completely misguided.

Full Employment

When we visited Berlin, we were told the story of Communist Berlin, in which a person was paid to make a note every day of the clocks in Alexanderplatz. This is the problem with the obsession with unemployment. Employment by itself should not matter, but employment on what. If people are exchanging their work for money but not producing goods valued by others, that amounts to wasted resources, money, and labor.

This is the problem with public employment. Instead of a positive, it is a waste of resources. The government necessarily takes resources from the productive sphere—real resources that people demand—and redirects them to uses that people do not demand, such as filling forms, making military uniforms, or making munitions.

So yes, the government could tax or inflate enough to employ everyone in an economy, but that employment would take resources from the community, not add to them. They would just be wasting potential. This kind of use of employment just makes everyone poorer. This is what war full employment looks like.

At the beginning it gives the impression of full employment, but when the war finishes, the subsequent spike in unemployment is not because the government is not spending, but because the community has been depleted of resources.

Technological Advances

The idea that war fosters innovation and advances of technology is contrary to reality. It comes from those eager to justify war and see positive inventions against an imaginary counterfactual in which these innovations did not happen. Very few compare wartime to peacetime innovations. Those who do have shown that, at best, the rate of innovations is altered but changes little overall, and, at worst, there is a decline in inventiveness.

But here is the catch. This innovation is misallocated. Instead of innovations to better serve the customers, innovation during wartime serves the government and is intended to improve weapons and destructive power. Weapons and destructive power do not improve the quality of life of the people.

By redirecting research mainly to military use, there is a huge opportunity cost that few take into account. If we take the null effect on overall innovation and the focus on military innovation during wartime, we can safely say that wartime produces a reduction in technological advances and improvement of production effectiveness.

Social and Political Change

A typical example of beneficial social change is the entry of women in the workforce, wrongly attributed to the wartime economy during WWII. I say wrongly attributed because if we study labor market changes in countries that did not participate in WWII, such as Spain, we can see the same trend of female participation in the labor market. This is just another private social trend that people attribute to government intervention. The reality is that these social changes were already happening and defenders of war attribute them to government and to war itself.

Another counterfactual is the comparison with other wars. Why did WWII change the social status of women but the Franco-Prussian war of the 1870’s did not? Or even earlier wars?

Political change is sometimes presented as a benefit of war. How this is even argued is a mystery, but the idea is that war can topple an oppressive regime and create something better. Recent events show the contrary. Syria, Iraq, and Afghanistan are all examples of wars that have either not caused a regime change or caused a chronic unstable civil war that has made the situation worse for the population.

In those countries in which regimes were, say “benign,” wars created an ideological shift towards more state power, the acceptance of more state intervention, and less individual freedom. Some people consider this a positive but, to me, all these are negative effects. Politically, war only benefits the government.

Conclusion

War has no positive effects. Mises wrote, “What distinguishes man from animals is the insight into the advantages that can be derived from cooperation under the division of labor.” And, “The market economy involves peaceful cooperation. It bursts asunder when the citizens turn into warriors and, instead of exchanging commodities and services, fight one another.”

The war between the governments of Israel, the US, and Iran will be just like all other wars, negative in all its aspects.

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