Economics and War

Economics and War

Carolina Inn, Chapel Hill, N.C.

September 15, 1994

About the Speakers. TUSS invited four distinguished economists to make presentations about their discipline=s perspective on war. Craufurd D. Goodwin is James B. Duke Professor of Economics at Duke University. He has written extensively on economic thought and policy, higher education, and the economies of war and national defense, including editing Economics and National Security: A History of /Their Interaction (Duke University Press, 1991). Christopher M. Davis is Lecturer in Russian and East European Political Economy at Oxford University and a Fellow of Wolfson College. He has numerous publications to his credit on the economy, the health sector, and defense in the Soviet Union and its successor states. Charles Wolf, Jr., is Dean of the RAND Graduate School and Director of RAND=s research program in International Economics. He has written numerous articles and books on economics, defense, and international affairs, including Long-term Economic and Military Trends (1989)and Economic Transformation and the Changing International Economic Environment (1993). Martin Shubik is currently Seymour H. Knox Professor of Mathematical Institutional Economics at Yale University. He has written extensively on game theory and political economy. His recent works include The Mathematics of Conflict (1983) and Risk, Organizations, and Society: Studies in Risk and uncertainty (1991)

Conference Proceedings.

After Richard Kohn welcomed the eighty people assembled for the conference, Craufurd Goodwin addressed himself to AWhat Economists Say about War, and Why. He noted that the subject of war could be thought of as antithetical to what usually interests economists. Economists generally dwell on equilibria — war, however, represents quintessential disequilibrium. Neoclassical economists like to apply a model in which actors are economically rational — under conditions of war, however, their model is less likely to apply. Furthermore, “Pareto-optimality,” a game theoretic concept whereby a certain outcome is assumed to be stable because players cannot move without making at least one player worse off — is often used to explain outcomes by economists. In the case of war, however, one party will necessarily be made worse off, so the usefulness of this concept is limited. Finally, neoclassical economists are resistant to assigning major analytical importance to the state. War, however, is not fought by competitive firms.

For economists, the above considerations make war a subject that is methodologically distasteful. Defense economics has had low prestige within the discipline. Funding is episodic, and when it does flow, it tends to come from agencies that clearly carry an attitudinal bias regarding the subject. Nevertheless, Goodwin stated that there has been some interesting work done by economists on the subject of war.

He first discussed the fundamental issue of why there are wars. The old “institutionalist” school of economics would offer the dearth of international institutions as one important cause. Economic studies from the 18th century discussed war in terms of the failure of nation-states to enter into encompassing contracts. Taking a different approach to the issue, Adam Smith wrote that war could be a profitable investment for a country. Peace, according to Smith, was bound to be unstable if a cost-benefit calculation favored a decision to go to war.

Another more recent body of literature, which Thomas Schelling leads, sees war as the result of competition run amok among nation-states. This school of thought sees countries as oligopolistic firms. Understood in this way, war and arms races are more an unintended consequences of competition than tools for national self-aggrandizement.

In contrast to these micro-economic and classical analyses, the historical-institutionalist current of economics literature more often uses macro-economic models and tends to conceive of actors as boundedly-rational. Some economists from this school have hypothesized that war is related to the early stages of a country accumulating national wealth. There is, it is claimed, a changing attitude toward war during the nation-building stage. This theory is used to account for Germany’s and Japan’s aggressive behavior. These countries had not yet developed wasteful consumption habits, possessed a surplus of resources, and applied them to war-making projects. A different sort of “historical-institutionalist” line of analysis, perhaps best represented by John K. Galbraith’s work on the Vietnam War, abandons the neo-classicists assumption that war is a consequence of the actions of rational actors. Galbraith found that US leaders trapped themselves into adhering to their initial explanation for the war in Southeast Asia, which revolved around a perceived Soviet-Chinese conspiracy. Galbraith also asserted that there were sub-national interest groups in the West who could benefit from the war.

Historical institutionalists also link war to the truism that people do not want to starve. Based on a rough sort of empiricism, it is claimed that people place their demand for employment ahead of political values. When the business cycle is at its low point, people are more likely to be attracted by the rhetoric of aggressively nationalist politicians like Hitler or a Mussolini, who in turn are more likely to begin wars.

Turning to the issue of what economics has to say about the question of how to prevent war, Goodwin first noted that those who focused on the absence of institutions as a source of war naturally advocate their establishment as a means of preventing it. In other words, efforts should be made to move away from nation-states existing in a Hobbesian “state of nature.” Institutional devices can be designed to help resolve disputes. Thinking of the problem as analogous to one those occurring in national-level politics, an industrial relations model could be extended to problems of international relations.

If one adheres to Adam Smith=s analysis of the causes of war, understanding it as the intentional product of a cost-benefit calculation, the most obvious way to prevent it is to do whatever possible to ensure that the costs of war exceed the benefits for potential aggressors. Measures to accomplish this end could include rules against prize-taking, insuring that the costs of a military build-up are clearly revealed, and the integration of the international economy such that trade dependence can make war less profitable.

Another prescription would be to constrain competition in expenditures and arms races through alliance formation and arms control. Goodwin noted that some economists have gone so far as to defend empires as a way of reducing direct Great Power competition. In the twentieth century, one finds analysts who portray the European Community (Union) and the Association of South Eastern Asian Nations (ASEAN) as ways to reduce inter-state competition. Finally, economists concerned with the allegedly aggressive predilections of business leaders would have the state maintain a safe distance in its relationships with such actors.

If privation causes war, then one plausible way to avert it would be to maintain full employment in the industrialized democracies. This principle could be seen as a driving force in the policies of the United States for twenty-five years following World War II, as reflected in the Marshall Plan and the creation of a foreign aid institution, the Agency for International Development. More recently, however, such policies have faded in importance, as has the mode of analysis apparently behind them.

Turning to what economists have to say about the costs of war, Goodwin said that the question could not be answered until two paradoxes were confronted. The first is that countries defeated in war often experience subsequent vigorous growth. One explanation for this phenomenon derived mostly from social psychological analysis hypothesizes that defeat reinforces the attitudes and beliefs that lie behind peoples’ savings and investment behavior. Such behavior contributes to growth following defeat. The second paradox is that although the destruction of a country’s capital stock should reduce national output, Caldor, Baran, and Galbraith, found that strategic bombing tends to increase productivity in the targeted area. They argue that the bombing has unexpected effects on incentives and time variables.

Economists are much more at home doing research on the issue of the trade-off between quantity and quality of armaments, or “bang for the buck..” They generally apply the same logic that they would apply to marketable goods. The widgets in this case, however, happen to be items like the B-1 bomber and the nuclear submarines. The economists’ marginal cost-benefit analysis, however, runs up against some countervailing forces, notably powerful business interests, armed service rivalries, and bureaucratic rules of thumb.

Some economists, such as Milton Friedman, have recommended market mechanisms to deal with the problems of defense armaments, while others have preferred more heterodox approaches. The latter, notably the economists of the New Deal, had the opportunity to experiment with some tools of a command economy during World War II. Detractors of a market approach note that there may be several socially undesirable outcomes of letting laissez faire govern a system of national defense. First, regarding the acquisition of human resources, these critics have expressed concern that an all-volunteer army will disproportionately be composed of the poor and underprivileged. Second, they have argued that manufactured war goods have tended to be produced by oligopolists, rather than by a large number of competing producers, and that government intervention and regulation is therefore necessary. A related argument is that a market in defense goods would not be able to adapt rapidly enough to huge surges in the demand for product that could suddenly arise in a war situation. Third, some have argued that raw materials supplies must be protected from the possibility that market forces might lead to their premature exhaustion.

In his conclusion, Goodwin offered some observations about the readiness of the discipline of economics to contribute to the study of war. He said that he felt that economics is no longer positioned to contribute to the questions about the causes of war or the costs of war. This is due in part to the fact that the discipline has taken a strong turn toward prioritizing the development of abstract models and away from questions about institutions and other issues requiring the use of qualitative data. Game theory models, he argued, have contributed to social scientists’ understanding of superpower rivalry and conflict, but have contributed little to understanding such events as the Gulf War and U.S. intervention in Somalia and Haiti. The discipline does stand ready to contribute on the question of bang for the buck in a war-fighting system. Finally, Goodwin noted that one can reverse the question of how much economics has helped us to understand war and instead ask how war has helped spur growth in the understanding of economics. Many economists have had their thinking profoundly altered by the experience of war, because it has forced them to confront real world conditions not always dealt with in the discipline.

During the comment and question and answer period Charles Wolf commented that he thought it important to attempt to distinguish between what economists say as economists and what they say as political actors. He suspects, for instance, that Adam Smith’s writings on war can be more appropriately interpreted as falling under the latter category than the former.

Concerning what economics currently is likely to contribute to the study of war, there was some disagreement from Goodwin’s fellow panelists. Charles Wolf argued that currently there is interesting research being conducted on democratization and changes in information flows that might contribute to peace. Martin Shubik added that advances in mathematically based institutional economics will allow economics to have more to say about war than in the past. An audience member pointed out that some economists have studied the issue of warfare against another country’s economy through sanctions, citing the work of Hufbauer, Schott and Elliot.

One conference participant argued that a potential cause of some wars has been that decision makers have listened to “bad” economists and made improper decisions. This allegedly was the case during the inter-war period in Europe, when attention was distracted from Hitler’s racist drive for expansion by the supposed need to recognize Germany’s economic grievances. Martin Shubik responded that there are of course many causes of war, and that what seems to be in one case a particularly powerful set of explanatory variables illuminated by one discipline may become virtually irrelevant in another.

Christopher Davis provided an analysis of some of the similarities and differences between Quincy Wright’s treatment of economics and war in his 1941 book, A Study of War, and that of Marxist and Soviet economists. Davis argued that Wright neither distinguished himself as an economic theorist nor included much in the way of empirical analysis of any economic issues. Though Wright rarely referred to the work of Marxist or Soviet economists, Davis argued that the idea of comparing them is not too farfetched.

First, Wright and the Marxist economists both were attentive to the issue of the evolution of civilizations and the relationship of this process to war. Like the Marxists, Wright tried to link various types of civilizations with characteristics that were particularly likely to make them war-prone. Both Wright and the Marxists were attentive to the relationship between technology and war. Where they sharply differ, however, is their hypotheses about the relationship between capitalism and war. While Wright believed that modern capitalism is the most peaceful of systems, Marxists have of course emphasized how the development of states dominated by the interests of finance capital is linked to imperialistic warfare.

Marxist economists have said far more than Wright on the subject of the economic consequences of warfare. Marxists acknowledge that war can both cause the destruction of natural resources and cause technology to progress (though this progress generally is greatest in the nonproductive sphere of the economy). War also is believed by Marxist economists to discredit the ruling class, contributing to the eventual overthrow of the mode of production and an elevation to a higher stage of economic development.

On the topic of what economics has to say about preventing war, Wright argued that financial incentives had to be attached to a system of institutions that in their turn would help nations disarm and preserve peace. For Marx and Lenin, however, disarmament was not conceivable in an era of finance capital or in a period when capitalist and socialist nation-states compete against one another. In the subsequent discussion, Charles Wolf pointed out the Wright’s book is not social scientific in the sense of trying to make causal arguments, but is instead more encyclopedic and taxonomic. Alex Roland agreed, noting that the pre-science stage of an academic discipline often revolves around the production of a few viable taxonomies. Marxist economists who have studied war, on the other hand, quite clearly have a theory of causation. Wolf also argued that we need to disaggregate the concept of “warfare” given numerous past and present forms of conflict. One should not attempt to analyze global conventional war, local conventional war, police actions, unilateral actions, and other diverse forms of international conflict in the same way. Finally, one participant noted that the idea of the correlation of forces, which derives from Marxist economics, can be useful in discussing how nations go about waging war. Balance of payments theory may be relevant for the study of the conduct of war, and even for the issue of the sustainability of peace.

Entitling his talk AA happier side to the dismal science? Charles Wolf presented three non-dismal, realistic propositions concerning economics and war. He claimed that (1) economic factors can be instrumental in avoiding war; (2) the economic causes of war are minor and diminishing; and (3) that the formerly distinct metrics of economic power and military power are blurring.

Wolf argued that we still have not yet fully grasped the significance of the recent U.S. “victory” in a Great Power struggle that never reached the point of becoming a “hot war.” This historically significant event was heavily influenced by economic factors. Economic performance in the Soviet Union exhibited constantly declining rates of reported growth as the country staggered under the burden of an overdeveloped military and extensive external “empire.” Furthermore, the economic performance outside the Soviet Union contributed to growing skepticism within the Soviet Union over Khrushchev’s famous prediction that the Soviet Union would bury the West. Doubt accumulated within the Soviet bureaucracy as the West enjoyed relatively strong growth in the 1980s.

Wolf argues that in part, the United States attempted to manipulate economic factors in order to hasten the collapse of the Soviet Union. Wolf did not try to assign a relative weight to the influence of U.S. economic strategy against U.S. military strategy in “winning” the Cold War . He noted that some analysts have argued that the United States could have saved itself some money on defense expenditures because it underestimated how badly the Soviet Union was doing. Wolf argued that there was a fine line that US decision makers had to be careful not to cross in making and publicizing these judgments: if they had repeatedly played up the relative gaps between Western and Eastern economic performance, hardliners in the Soviet Union might have been strengthened. Such a development would not have served the purpose of bringing the Cold War to a peaceful end favoring the West.

Wolf’s second main point was that economic causes of war are minor and diminishing. He dismissed the idea that the US went to war against Iraq because of the issue of control over a natural resource, oil, although he did note that control of additional resources would have accelerated Saddam’s ability to wield weapons of mass destruction. Economic research reveals, Wolf said, that natural resources and economic size are not very important for economic development. Instead, he stated that technological progress is more important in independently accounting for economic growth. Economic conflict, Wolf argued, is unlikely to be transformed into military conflict.

Finally, Wolf asserted that the distinctions between economic power and military power increasingly are becoming blurred and perhaps less important. He pointed to the examples of dual-use technology and the use of military logistics in humanitarian interventions. Furthermore, research is progressing on whether economic inducements, of either a positive or negative nature, can be effective in attaining state goals. For instance, Rand researchers are beginning to suspect that for wealthier countries, the use of economic penalties may be effective, whereas in cases of relations with poorer countries, positive economic inducements are more likely to be effective.

Following Wolf=s talk, a number of comments were made on the instrumental use of economic factors in the United States-Soviet rivalry. One person noted that the West waged economic warfare in a number of ways against the Soviet Union since at least the 1940s, so these strategies could hardly be treated as an innovation of the Reagan era. Another pointed out that the growth rate of the Soviet economy had been declining since 1965, well before the Carter and Reagan spending spurts on strategic arms and defense systems. Wolf responded generally that what was especially important during the 1980s was a combination of factors: Soviet deteriorating economic performance; and the bolstering of the NATO military shield to deter Soviet Union decision makers from developing a “use it or lose it” mentality.

One participant asked if the Paul Kennedy thesis about imperial overstretch and the rise and decline of great powers offered any insight about the future of the United States. Wolf responded by saying he does not think that U.S. military spending is a major drain on national wealth, citing an estimate that defense spending accounts for four percent of U.S. GDP. Related to this point was a suggestion by another participant that at times in history it seems as though there are such things as free lunches: military spending need not be correlated with a decline in economic growth, as evidenced by the United States experience during the World War II rearmament years.

Addressing the subject of ATerrorism, technology and the socio-economics of death,Martin Shubik devoted his presentation to the economic rationality of investments by state and non-state actors in biological warfare technology.

Shubik drew participants’ attention to the potential lethality of small, well-organized, reasonably-well financed terrorist groups. Such groups may be financed by third parties, complicating the question that defense analysts ask about who one needs to defend oneself against. During the Cold War, there were fairly clear definitions of deterrence, as well as a clear understanding of who one=s friends and enemies were. This is no longer the case. In twenty years or so, Shubik asserts, developments in biotechnology could produce a situation in which one or two individuals could develop and use biological weapons.

To provide a reference point, Shubik provided the audience with an estimate of the cost of acquiring nuclear weapons. Nuclear power requires a financial investment of about $200 million. Biological warfare, however, currently requires around only $10 million, and this cost should decline with time.

The logic of developing biological weapons is, unfortunately, compelling from an economic standpoint. Economists have long argued that the industries likely to grow most quickly are those featuring low entry-costs for new firms, a relatively small plant size, products with multiple uses, a high growth potential, and relatively cheap inputs. Two biological weapons Aindustries fit these criteria well: the production of anthrax and botulism.

Economics has also contributed to military operations research, an area that also points to the “advantages” of biological weapons. According to Shubik. military operations research is interested in the costs of killing. Recent improvements in international communications technology have increased dramatically the permeability of the nation-state. While “old” terrorist technology has been capable of killing only relatively small numbers of people, such as the 250 killed in the Beirut Marine barracks truck bombing, the “new” technology changes things dramatically. Biological weapons are the ultimate as far as “bang for the buck” is concerned. “Entrepreneurs” in the biological weapons industry do not have to innovate much to produce a product with plenty of bang. Some of the previously high costs of production brought on by the handling and delivery of the material have been lowered dramatically by virtue of the development of such things as aerosol devices. Finally, Shubik noted that Acounter-technology, such as inoculations and damage control measures is to date far less well-developed and tends to be very expensive.

Shubik concluded in part by saying that one question that needs to be researched is why have things to date been so good, considering the likelihood of the imaginable horrific scenarios involving biological warfare technology and small groups of political actors. In order to approach this issue, disciplines other than economics will be more helpful, such as social psychology. When one thinks about various defensive measures effective in reducing risks posed by potentially “dangerous” groups, questions immediately come up regarding civil liberties and freedom of information. Dealing with such issues obviously also falls outside the purview of economics.

In the comment and question period, one person asked if what Shubik is talking about is really a police issue rather than a subject related to the study of war. Shubik responded that what appears to be a small group terrorist action may in fact be sponsored by some other country. When one considers a scenario in which hypothetical countries one and two are involved in a tense situation, and country three sponsors a biological attack on one or both, it could set off an all-out conflict between one and two that somehow benefits country three.

Another questioner raised the issue of the rationality of large organizations (especially nation-states) utilizing weapons against which they have no means of defense in the event of retaliation. Shubik responded that if we first set aside the issue of “psychopaths” using such weapons (on the grounds that such cases are not instances of “war”), there is still the important problem of an attacked nation distinguishing friends from enemies and enemies from terrorists.