War: What is it good for?

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“A major war starting at the end of 2012 to 2013 […] will drive the Dow to 5,000”, said Former Goldman Sachs technical analyst Charles Nenner recently. “If [the current economical context] turns into a trade war, it is the most momentous thing of 2011. Trade wars always lead to wars. Nobody wins trade wars, except generals who end up fighting the physical wars when they happen. This is very dangerous”, said the well-known US businessman and investor Jim Rogers.
“Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is an inevitable consequence of the current global economic situation”, wrote the American hedge fund manager Kyle Bass. But why are these economic gurus – generally known for the pertinence of their “predictions” – forecasting war?

Is “Military Keynesianism” really coming back from the post-World War II era? For memory, the Keynesian theories implemented to re-launch the economy after WW2, in fact, have been translated in a model of permanent war in “peace” time based on one thing: the practice of a budget deficit eventually refloated by an increase in tax revenues, i.e. use today the wealth of tomorrow… thinking you are rich while you have never ceased to be “poor” (big up to Spain, by the bye)…

Many influential people keep thinking that war is eventually good for economy. After having long studied the effect of WWII on the economy in great detail, economist Robert Higgs thinks that it was “optimism”, rather than stimulus spending, which got us out of the depression: “The performance of the war economy […] broke the back of the pessimistic expectations almost everybody had come to hold during the seemingly endless Depression. […] The war itself did not get the economy out of the Depression. But certain events of the war years – the buildup of financial wealth and especially the transformation of expectations – justify an interpretation that views the war as an event that recreated the possibility of genuine economic recovery. As the war ended, real prosperity returned.”

OK, fair enough: Let’s go to war!… but can we adapt the 1930-1940 scenario to today’s events? Many other economists (“Austrians” and even Neo-Keynesians) assume that “Military Keynesianism” cannot work today because WWII was different from current wars, notably because in the modern world (the developed countries, at least) this kind of policy is no longer viable due to the fact that military strength is now built on high technology professional armies, and the military is thus no longer viable as a source of employment of last resort for uneducated young people (may God bless the drones!). Besides, the multipolar world today and America’s position in it are far different from what they were in 1945, notably because we have got much more debt now than at the beginning of WWII. Put another way, the stimulus of WWII had more of an effect, because it was acting on a lower debt load to start with. Today, most part of the advanced Western States, and many others, have already picked up almost all what they can: public debt ratios are close or superior to 100% of GDPs. In brief, almost all the future wealth has already been mortgaged! So no money left to fight! …unless we print more banknotes.

Are we about to change the paradigm that has governed our system for decades, nay centuries? There is no sign of it. Actually, the influence of the preparation of war on the economy has globally been the rule for 200 years, from the Napoleonic Wars to the collapse of the Soviet Union. It has generated tremendous R&D efforts, an increase in women’s work, inflation growth, huge public debt, development of the State’s economic role, etc. However, Nobel-prize winning economist Joseph Stiglitz, who is a Neo-Keynesian, claims that war is bad for the economy: “War is widely thought to be linked to economic good times. […] Today, we know that this is nonsense. The 1990s boom showed that peace is economically far better than war. The Gulf War of 1991 demonstrated that wars can actually be bad for an economy.” Even Former Federal Reserve chairman Alan Greenspan agrees: “The freeing up of resources previously employed to produce military products that was brought about by the end of the Cold War is a key factor of [the US] economic performance.”

What a mess! Actually, there is no Economy book where you can find a definition of “War”. You can only find studies on War and Economy where authors try to analyse the relations between the two. Good luck!

Republished with permission of ADIT – The Bulletin.