It is ironic that, from a certain perspective, war can be beneficial for an economy.
War leads to higher government spending, higher employment and can, therefore, provide a boost to domestic demand, economic growth and help reduce unemployment. For example, both the Korean War and the escalation of the Vietnam War provided a boost to domestic US demand, leading to periods of high economic growth. Companies involved in the manufacture of arms saw a rise in demand and profit.
See: War and the Economy
This boost to domestic demand doesn’t have to come from military spending. But, war is often a very good excuse for the government to borrow much more than it could do in peace time. In war time, UK national debt has often risen above 150% of GDP. (in war, there is often a patriotic fervour to buy ‘war bonds’)
UK national debt rose to 150% at the end of World War Two – but then rose to 240% by the early 1950s. However, this level of national debt was not a problem to a long period of economic expansion post World War Two.
Although war can provide a temporary boost to domestic demand, it is important to bear in mind the cost of war. In particular the opportunity cost of military spending, the human cost of lost lives, the cost of rebuilding after the devastation of war. Also, it depends on the kind of war, how prolonged it was, where and how it is fought.
See: Cost of War
What Happens After War?
War invariably leads a legacy of debt and an army of demobilised soldiers. After the Second World War, the debt was not a constraint to growth and we had one of the longest periods of economic expansions on record. (Post-War Britain)
However, the aftermath of war is not always so positive. The UK struggled after the end of The Napoleonic war and after the end of The First World War. In the 1920s, the UK struggled with a long period of unemployment – returning soldiers found very poor employment prospects. Yet, after the Second World War, the US and Europe experienced full employment.
The German economy was ravaged by the aftermath of the First World War and reparation payments. Struggling to meet reparation payments, Germany resorted to printing money – leading to hyper-inflation. However, after the Second World War, the Allies didn’t make the same mistake. The US gave a generous aid to Western Europe – helping the rebuilding process and leading to the economic miracle of Europe, and Germany in particular.
Opportunity cost of war
It is worth briefly mentioning the opportunity cost of war. If a government spends and extra $300bn on military spending, that is $300bn that could have been spent on building hospitals and schools. According to a report by the Watson Institute (reported by Reuters) the cost of the Iraq War was $2 trillion. This $2 trillion could equally have been spent on more constructive development projects.
It is possible to estimate economic costs of war – cost of military, e.t.c. However, it is harder to estimate the psychological costs of war – the pain of death, suffering, fear and disability. A conflict can leave soldiers and civilians traumatised for the rest of their lives. In recent years, post traumatic stress syndrome is more widely accepted, but putting a cost on how war negatively affects those involved, is difficult to do.