Gain and Loss of War: Addressing with the Broken Window Fallacy and Gun and Butter tradeoff
Muhammad Amadeus (Research Executive)
It is very unfortunate how the world is currently having two big wars in the Middle-East and Ukraine that have caused immense human suffering. Without diminishing the humanitarian impact of war, this essay will discuss how wars created gains and losses economically. In short, this essay will discuss how war has historically caused short run economic growth through increased government spending and employment as well as long run economic growth through innovation. Then it will address counterarguments to these gains through the perspective of the broken window fallacy, guns and butter trade-off, and the burden of war funding.
Gains of War
US participation in World War 2 contributed to its boom right after The Great Depression. Its real Gross National Product (GNP) saw a 55% increase from 1939 to 1944 (Rockoff, 1995). Gross National Product measures the total value of final goods and services produced by a country’s citizens in a given year. Moreover, its unemployment rate fell from 14.6% to 1.2% from 1940 to 1940 (Tassava, 2009). The main factor is the increase in government military spending which rose from 1.4% of real GNP in 1939 to 45% in 1944 (Rockoff, 1995). This spending shock boosted aggregate demand (AD) directly through the Government Spending (G) component of AD and through the multiplier effect. The multiplier effect is especially high as the country has just suffered from a depression, causing people to have higher marginal propensity to consume. In other words, due to recovering from depleted income, people spend a larger portion of their income. And as a person’s spending is another person’s income, this mechanism boosts the income, spending, and output of the whole economy. Moreover, the country was not operating at full capacity due to the depression. Hence, when the demand-side of the economy was stimulated, the supply-side had the capacity to match it.
The decrease in unemployment rate was due to 2 distinct factors. .The first factor was defence sector recruitment. The second one was people taking up the jobs that soldiers used to occupy, before having to go to war. This is especially true for women, whose labour participation rose by 4.9 million, which is a lot considering the American population of around 130 million (Rockoff, 1995).
Besides short run effects on production and employment, wartime competition also spurs innovation. This phenomenon is in line with the economic principle saying competition leads to efficiency. This development especially happens in the field of nuclear power, aerospace, and shipbuilding (Tassava, 2009). Despite its humanity-ending capacity, nuclear power has contributed towards renewable energy, medicine, and scientific research. These innovations drive economic growth in the long run.
The Broken Window Fallacy
It looks like that wars have been really beneficial towards economic growth. This might be in line with the”broken window fallacy” , which war supporters use as argument (Mortanges, 2023). The story starts with a shopkeeper who broke his window. The broken window resulted in the shopkeeper paying the window-mender some money, which will be used to buy other goods, stimulating the economy. Similarly, war resulted in the government spending money on military effort, stimulating the economy.
However, we call “the broken window fallacy” a fallacy for a reason, this parable does not account for the concept of opportunity cost. A research by de Groot et al. (2024) estimated that the world’s GDP would have been 12% higher if there has not been any armed conflict since 1970. There are two reasons for this forgone growth. Money-wise, the shopkeeper could have used the money for more productive activity, just like how the government could have used the money for building schools and hospitals. Resources-wise, they could have used the glass to make test tubes which could boost innovation, just like how the economy could have used the steels, irons, and labour hours for other things more useful than a grim-reaping machine.
Growth is not Prosperity
Even though US GDP was higher, it does not all translate to consumer welfare as the economy’s production is diverted from butters to guns (Rockoff, 1995). In other words, during wartime, the economy prioritised the production of war materials instead of consumer goods. This can be seen from the fact that the production of consumer durables plummeted during that time. Thus, while overall production may have increased, this growth is less desirable when considering that it came at the expense of consumer goods, with resources diverted toward military output instead.
War Funding
All of the government spending made during wartime must be paid back sometime in the future. If it is funded through a future tax increase, then disposable income will fall. If it is funded through borrowing, it will crowd out private investment projects. If it is funded through money printing, it might lead to hyperinflation just like what the Weimar Republic experienced in the early 1920s. Either way, the effect is adverse.
Conclusion
In conclusion, even though war seems to be good for the economy in the short run and the long run in hindsight, if we look closer, we can observe how the economy could have been better otherwise. Moreover, the economic growth experienced during the war may not translate to consumer welfare as it is dominated by the production of military goods instead of consumer goods.Furthermore, the burden of war funding will hurt the economy in the future no matter the choice of funding the government goes for.
References
de Groot, O. J., Bozzoli, C., Alamir, A., & Brück, T. (2022). The global economic burden of violent conflict. Journal of Peace Research, 59(2), 259–276. https://doi.org/10.1177/00223433211046823
Pahud de Mortanges, C. (2023). <em>War and the Broken Window Fallacy</em>. ORBi-University of Liège. https://orbi.uliege.be/handle/2268/301475.
Rockoff, H. (1995). From Plowshares to Swords: The American Economy in World War II. https://doi.org/10.3386/h0077
Tassava, C. J. (n.d.). The American economy during World War II. EHnet. https://eh.net/encyclopedia/the-american-economy-during-world-war-ii/#:~:text=The%20gross%20national%20product%20of,1943%20(Milward%2C%2063).