Are economic cycles connected to war?

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Question: 

I was just thinking about the massive economic dislocations resulting from World War I and their impact on Weimar Germany. But the dislocations spread well beyond there. The War had bankrupted England and France (though not so much the U.S.), to the extent that they forced Germany to pay such enormous reparations that Germany was a basket economic case in the 1920s. The U.S. economy boomed during that period, but it then crashed ten years later. After World War II, somewhat contrariwise, we had an unprecedented and never repeated period of growth and prosperity. After Vietnam, we had galloping inflation, followed (I think) by a recession. After seven years of a ruinous war in Afghanistan and Iraq, we had a Great Recession. Now I'm a political scientist, not an economist, but from the standpoint of political economy, it would seem that there must be correlations between massive military expenditures and economic cycles. The economy, that is to say, does not exist in a vacuum. So, Dr. Economist, is it possible that the famous "economic cycles" are not merely cycles that happen all by themselves, but rather sine waves that correspond with other fluctuations in military expenditures and war? As a political historian, I know that it has always been wars that have bankrupted nations and caused political upheavals. This is not new. Why not in our age? Why do we teach our students that there are recurring economic cycles without, in traditional economics, relating them to the military adventures of our own government, And that of others?

Answer: 

There are really two questions here: (1) what are the causes of economic fluctuations, generally? And (2) what role do wars and military spending play in these fluctuations? 

 

Answering the first question is beyond the scope of this forum, and is broadly the topic of concern for an entire branch of economics known as macroeconomics.  The answer to the second is that, indeed there is a large literature exploring the effects of military spending on the economy, which can be seen as a subset of the mechanism explored by macroeconomics. 

Most economic historians today, following the work of Peter Temin (MIT) and Barry Eichengreen (UC Berkeley) attribute the Great Depression to the monetary shock created by the First World War.  But as Temin and Eichengreen note, it was not simply the shock, but inappropriate monetary policy responses in its wake that caused the Depression.  Specifically, efforts to return to the gold standard created balance of payments problems that led in turn to deflationary forces.  Some go further and attribute the rise of Hitler and thus the Second World War to the depression, so the process propagated for a long time.

Similarly, spending on the Vietnam war contributed to rising inflation in the 1960s, and many of the subsequent economic woes of the 1970s (stagflation).  But, again it was not simply war spending, it was the effort to finance the war along with major domestic spending increases (the War on Poverty) while not raising taxes that caused the problem.

Robert Higgs is another economic historian who has written extensively about the political economy of cold war military spending, linking it both to political sentiment and to the larger economy. 

In sum, economists have long recognized that military policies and spending matter.  But they tend to approach the problem by seeing these actions as examples of a larger class of actions that affect the behavior of the economy in consistent and predictable ways that are described by theories of aggregate economic fluctuations. 

References

Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression  (1996) https://www.amazon.com/Golden-Fetters-Depression-1919-1939-Development/dp/0195101138

Robert Higgs, “The Cold War Economy: Opportunity Costs, Ideology and Politics” Explorations in Economic History 31 (1994): 283-312.

Peter Temin, Lessons from the Great Depression (1991) https://www.amazon.com/Lessons-Depression-Lionel-Robbins-Lectures-ebook/dp/B002YK4UWS/ref=sr_1_1?s=books&ie=UTF8&qid=1509586085&sr=1-1&keywords=lessons+from+the+great+depression

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Last updated on November 8, 2017