How War Affects the Economy

Custom Student Mr. Teacher ENG 1001-04 23 September 2016

How War Affects the Economy

Countries that have experienced periods of war have had their economies mostly affected negatively. Considering war and the economic history, it is evidence that war has influenced the economic history across the world for centuries. This influence is both negative and positive. In most cases, those who win during wars have ended up getting their economic institutions and trade patterns in shape. Wars have also led to technological development, increased workforce among others (Goldstein, par. 1).

However, the negative impacts of war outweigh the positive impact in terms of waste of money and resources on war, destruction of human capital, trade, resources available and labor management. Wars have also led to loss of many lives thus reducing the population which greatly contributes to economic growth at large (Goldstein, par. 1 – 2). Where possible, wars should be avoided by all means, no matter how appealing the positive impacts might seem to be, since in return they are expensive, destructive and disruptive thus greatly affecting the economies of many nations negatively.

The negative impacts of war During wars, the economies of the third world countries are the ones which often get affected to a larger extent. Winning in war is determined by how powerful a nation is. More powerful and stronger nations are better placed and able to represent their interests than others. For example, The United States of America being the super power wields incredible power and influence. Before any country engages itself into war, it should consider its strength and influence and also who they are fighting with (Wade par 1-2).

Some of the negative impacts of war include the following; War Causes Increased Inflation Rate According to Goldstein (par 4), waging war requires three things; ‘money, money and money’. In short, waging war requires a lot of money and therefore many nations have ended up printing a lot of currencies to finance war forgetting that the printing of more money fuels inflation. Inflation always acts as an indirect tax on a national economy. For instance, during the first and second world wars, there was the industrial warfare that in return created inflationary pressures across large economies.

The governments mobilized very many societies for war which led to conscripting labor, building up prices in markets for natural resources and industrial goods, diverting of capital and technology from civilian to military applications among others (Goldstein, par. 4), During the World War I, there were numerous inflations as participants broke from the gold standard to issuing of currencies freely. This led to increased inflation, a thing that was experienced even during the US Civil War, First and Second World Wars, Vietnam War among others.

War induces inflation which is strongest in war zones but also to neutral countries, causing disruption and scarcity of resources, for example the US during the World War II. In addition, as war continues in the present day, inflation continues to increase driving the currency to worthlessness. The cost of war during World War I was almost $ 40 billion in addition to 85 years of inflation. This expenditure in figures would be closer to $1100 billion in the modern terms (Goldstein, par 2-5).

War Leads To Increased Government Debts Some nations borrow money for war and what happens is that they end up in a lot of debts for the government. War related debts always drive many states to bankruptcy. An example of such a nation is Spain in 1557 & 1596 when there was war (Goldstein, par. 5). Capital Depletion Many wars create zones of intense capital as well as destruction. This destruction happens in farms, factories and cities and cause reduced economic output which in return causes famine and plagues, for example during the 30years’ war that happened between 1618 and 1648.

During this time, one third of the population was killed in Germany as the mercenaries plundered civilians with the latter becoming mercenaries so as to try to survive. In addition, the First World War reduced production by nearly half and starved hundreds of thousands of Germans to death. These led to more than a decade of lower Soviet output. Also, during World War I in 1918, influenza epidemic killed millions of people thus reducing the work force (Goldstein 2003, par8-9).

Some other 407,000 Americans lost their lives during the Second World War and this led to decrease in human cost or labor which would have otherwise contributed to the economic growth of America (Henderson, par. 7). In Germany, there was a massive loss of lives which amounted to 1. 7 million young men and 4. 3 millions of them being wounded during the First World War. The total casualties were thus adding up to 7 million though this also included some prisoners and also those listed as missing. The Germany economy suffered terribly during this war and its industrial output fell by over 40% between 1914 and 1918.

This was because many of the working men had been killed in war and so the machinery was run by ill trained people at the end of the war. In addition, the workforce was not physically fit to work very hard as a result of the food shortage that was being experienced in Germany then. Estimates show that 35% of all trade was usually organized illegally on the black market and the economy suffered from shortages of raw materials (School of History, par 2). War Impact On Domestic Economy Wars bring about impact on the domestic economy too.

This happens through reduction of the level of capital stock as well as its growth. There is usually capital flight which dramatically leads to reduced private investments. In addition, the political economy models show worsened government’s fiscal balance which results from the internal conflicts that ends up affecting the aggregate domestic economy (Imai and Weinstein, par. 1). Economically, many activities are enhanced into conduct of war through the act of the government shifting the expenditure from output to war.

Politically, there is evidence of weaker incentives which help maintain the fiscal balance. This is attributed to a shorter time horizon and weaker accountability of an electoral constituency. The result of all these shows that the driving forces can be attributed to the negative effects of civic war on the economic growth which is a decrease in domestic investment and especially the private investments (Imai and Weinstein, par. 1). War Is Expensive A lot of resources are normally used to wage war and this definitely leads to a minus in the economic growth of any nation.

When a government spends a minimum of 2% of its GDP on its military on average, its economy is affected as well. Therefore, no matter where the finances or resources for funding comes from (payment of taxes or debts) , the resources used in war should be used to do other constructive things in order to raise the economic growth such as, paying more wages to workers to motivate them, construction of roads, large scale farming among others. Most governments ends up using a pool of finances to buy tanks, trucks, fuel, clothing, parachutes, bullets, guns, airplanes among other equipments of war.

They also hire laborers to do the job that is, hiring more military personnel which is still expensive (Henderson, par. 3-4). All the capital and labor used to do the above produces output and labor that would otherwise have been used to develop the country’s economy. The cost of all that is used in war is called opportunity cost which means the value of the highest valued opportunity foregone. Thus, the opportunity cost of the resources used in war is the value of the resources that would otherwise have been used by the government on other things other than war (Henderson, par3-4).

For example, during the Second World War, the US government spent more than 7% of GDP (Gross Domestic Product), on war. In addition, there was a peak of the United States government spending a large portion of its (GNP) Gross National Product on war in 1944. This government spent about 38% of the GNP on war while as much of the capital and labor used in this war would have been used to produce things like automobiles for domestic economy or even exports among other things.

In short, there would have been no rationing of meat, tires, nylons eggs, butter and sugar and the standard measure of prosperity would have been much more prosperous (Henderson 2006, par 4). On the other side, the cost of war in Germany during World War I was estimated to be US$ 40 billion; this was a lot of finances all being put to war (School of History, 2004, par4 ). Also, during World War 1and World War II, consumer spending is said to have increased a lot though it was still less than the long-term growth rate.

The increase in output that was experienced during World War II considerably reflected the massive rise in military spending. At the climax of this war, the US government spending had taken up over 40% of the GNP whereas the Korean War spending was more moderate with the government spending a maximum of about 20% of the GNP (Ohanian 13). Another example showing the costliness of war is the Iraq war. According to some approximations made, Iraq and some other Middle East countries are assumed to spend significantly on defense.

This is represented by an increase in defense spending by OPEC (Organization of Petroleum Exporting Countries) which is a clear indication that the economic growth of these countries is affected (McKibbin and Stoeckel 2). The Iraq war is possibly costly to the economy of the world. However the costliness is dependent on how long the war lasts and also the compounding effect of many different factors. The main economic effects include higher budgetary cost, rising oil prices and the greater uncertainty of things, leading to negative effects on economic growth.

For example, the United States can experience a knock-on effect if Japan is unfavorably affected by war with Iraq. In such a case, the rise in oil prices is likely to change the prices of other energy sources like coal and natural gas (McKibbin & Stoeckel 1). In addition, when the prices of oil rise, Japan experiences high risk in terms of economic effects than either Europe or United States since it depends mainly on imported oil. Australia is also not left out since it is also affected negatively when the oil prices rise despite the fact that it exports coal and gas in large amounts.

The longer the period a war takes, the more there is prolonged and uncertainty of the cost of oil (McKibbin and Stoeckel, 5). The war in Afghanistan also led to estimated loss of US $ 2-3 billions to the economy of Pakistan in 2001. This caused effects such as loss in revenue, decreased exports, reduced foreign investment as well as a slow down in private investments (Nisar, par. 18). War Leads To Increased Tax Rate The tax rate is usually increased in many nations during war so as to be able to finance the whole process of war. For example, there was increased tax during the Korean War so as to help finance the war.

The capital tax rose to nearly 63% in average, the highest tax rate of capital income that has ever been heard in the history of the United States and it was sufficient to finance the Korean War efforts. Moreover, during the Second World War, the labor tax rose to about 19% with the capital tax rates ranging to an average of 60% compared to the time prior to the war, whereby the average marginal tax rate on capital was about 45% and the average marginal labor tax rate was just 9%. This high tax rate generated significant revenues and at the same time, the revenue was not enough to finance the war spending (Ohanian 13).

All the above listed effects show how destructive and expensive war is to the economy of any nation. The Positive Effects Of War On The Economy The positive effects of war are not as many as the negative effects and no matter how attractive they might be the negative consequences still stand conspicuously. Some of the positive effects include the following; War Leads To Development Of Infrastructures And Technology Sometimes war creates a chance for infrastructural development like roads and thus clearing away the outdated ones.

This gives way to the rebuilding of the economy world wide thus leading to long-term benefits. Technological development also rises as a result of war though not always. For example, after the two world wars, French production is said to have grown faster after 1950 than before 1914. Also the layouts of European railroad networks were strappingly influenced by the strategic military consideration. This was evident after Germany used railroads effectively to conquer French forces especially in 1870 to 1871(Goldstein, par 12-13).

According to Tassava (par. 1-32) there has always been scientific and technological innovations that comes as result of war. These innovations were the key aspects in the American war effort as well as important economic factor in the Allies’ victory. During war, there is usually development of weapons among other tools of war. The American experience after the Second World War was impressive because of the scientific and technological change which positively affected almost every aspect of the war economy. There was also the Manhattan project which was meant to creating atomic weapons.

However, this project was often hidden from the public view because of the wartime secrecy. The U. S. army and several private contractors gave direction to scientists, engineers and workers to build a nationwide complex of laboratories and also plants that would manufacture atomic fuel. They also gave direction to fabricate the atomic weapons. For example the laboratories at Chicago and California-Berkeley universities, the uranium processing complexes at Oak Ridge, Tennessee, Hanford, Washington among others (Tassava, par. 32). Another innovation that arose during war time is the building of ships.

This was the third example of innovation’s importance to the war economy. The fighting fronts in Africa, Europe and Asia that had their plans allied in World War II were totally dependent on the movement of war material produced in the United States. Hundred merchant shipyards in the U. S produced 5,777 ships at a cost of about $13 billion between 1939 and 1945. The technology of building ship later became a low-technology compared to the atomic-bomb project and the aerospace industry a sector that was amazingly successful (Tassava, par. 35).


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  • University/College: University of Arkansas System

  • Type of paper: Thesis/Dissertation Chapter

  • Date: 23 September 2016

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