In a
Financial Times article by John Authers (
https://www.ft.com/content/3731ac78-88ec-11e7-8bb1-5ba57d47eff7),
he asks readers to think about whether
war
could be good for their wealth
—and boost the economy. He links this
question to the current situation involving North Korea and the U.S and the
consequences that could arise from this situation.
He focuses much of his discussion on the question of whether war could
benefits stocks, especially those of U.S. firms, and whether this would then
increase wealth. He implies there is a link here to economic growth (GDP).
Growth of GDP can be defined as growth of the total income earned
by domestically-located factors of production in an economy (sourced from class
notes). Yet through most of his article, the author refers to stock market
performance as a way to determine whether wars boost an economy or slow it
down. As our class textbook states (Mankiw, Eighth edition, page 18), “GDP is often considered
the best measure of how well the economy is performing.” In fact, the textbook
lists three macroeconomic variables that are “especially important” in measuring the
performance of economy and the stock market’s performance is not one of them: real GDP, the
inflation rate, and the unemployment rate. When an economy is growing, the
stock market is not always growing (and vice versa). This is one flaw in making
the connection between war, stock prices, and economic growth.
He does mention a study by a consulting firm, Oxford Economics,
that collected data on GDP growth in order to look at this question. Oxford
Economics collected data showing that short wars lasting a year or less with
few lives lost can boost economic growth. But long wars with lots of lives lost
can decrease economic growth. I think this is too simplified because in reality
it can be impossible to “control” a war’s length and a war that everyone thinks will be short in the
beginning (World War I, our war in Afghanistan) can become long. So it’s a dangerous thing to
hope that a war will be short and help boost economic growth.
Authers then goes on to argue that most of the wars the U.S has
been involved in historically have led to growth in the economy. One example he
uses was how World War II actually took the U.S. out of the Great Depression.
He then goes on to say that wars at first bring strong economic loss but then
rebound to growth. This is important to take into account because if your
country is in a precarious situation or in an economic depression then maybe
the population may become so desperate that they begin to believe war could be
the only way out (such as in Germany during the 1930s). This of course is not
taking into account, however, the casualties caused by war as mentioned in the
article, as well as the devastating destruction and chaos caused by World War
II. How can the value of even one life lost be measured in the field of
economics?
The other point I’d like to make is that a war with North Korea could lead to such a
terrible escalation involving nuclear weapons (of mass destruction) that it
could destroy much or part of one or both countries and their economies. In this case, war is obviously a terrible way
to try to grow the economy and could more likely lead to destruction of the
economy.
People may point to World War II as a war that actually boosted
the US economy. Much of the economy was put to work during World War II – through US factories
manufacturing planes, ammunition, and other goods needed to fight the war. We
know from the model for calculating GDP that an increase in national defense
spending increases GDP. But real life does not always fit a model and we’d have to take into
account what a war would do to the other components of GDP like exports and
personal consumption. Typically, This is because wars can cause consumers to be
more uncertain about the future and wary of buying goods and services, thus
leading to less consumption and lowering GDP growth. If things deteriorate to a point where there
are shortages of goods (as in World War II), consumption can decline
rapidly. And countries at war often
export less because the factories are needed to produce for the war.
Above all there was a huge cost to the US and many other countries
around the world brought about by this war – through large numbers of lives lost and
factories and other buildings in countries in Europe and Asia (Japan)
destroyed.
Authers nears the end of his article by leaving us with a controversial
quote, ‘’Wars
are dangerous gambits. If they are swift and not too damaging, they can boost
growth.”
I think the most sensible line of the entire news article is the
last statement. There are much better ways to try to grow an economy than to go
to war—that
don’t
carry the terrible risks and losses that always come with war. These could
include government incentives for people to invent and innovate and so develop
new products and more efficient ways to make existing products.
All in all, there may be wars that have caused growth of the
economy, but could even one casualty and the pain caused ever be an acceptable
way to stimulate economic growth?
