#18 War, what is it good for?
Absolutely nothing, but if you have to think about it carefully
It took me additional time this week to organise my thoughts on a very pressing topic: war and economics. There's a lot to unpack, and it's easy to misconstrue.
For my regular readers, I will transition to a biweekly newsletter schedule, since I started a weekly column for the Dutch magazine Vrij Nederland.
Firstly, a disclaimer: this isn't about politics or the war itself; rather, it focuses on the response to military aggression in general and its economic implications.
And a second disclaimer: it is quite lengthy (again). I tried to summarise the main arguments in the first part and the rest (including graphs and more references) for the very, very interested reader.
Why did I put so much effort into this? Mostly because I miss fundamental, nuanced discussions on war and economics. It seems to scare people away. Navigating nuances is challenging nowadays, with wars dominating global headlines. The prevalent sentiment, "We must stand up against aggression," resonates widely, underscoring the necessity for a credible threat. In such times, pacifists are often labelled as naive idealists, accused of appeasing aggressors. Although I understand this perception, my viewpoint differs.
I believe in anti-war doctrines that promote non-violence, passive resistance, and moral purity. The ultimate answer is a military one. Unfortunately, any reservations about the massive spending on weapons are often viewed as support for Russia or opposition to Ukraine. That's not my intention. I support Ukraine, but I also believe we should explore more civilized solutions, even if I don't have all the answers.
Call this practical pacifism: While it is possible that state-led war may be justified in some cases, it is extremely difficult to determine if any single instance of war is, in fact, justified. This paper on practical pacifism presents a compelling argument for why adopting a stance of practical pacifism in policy-making is economically sensible. Practical pacifism accepts that war might sometimes be justified but emphasizes that political leaders often lack the necessary information to make well-informed decisions about when war is truly warranted. The incentives within political systems can lead to decisions that prioritize personal or political interests over the public good. The decision-making process often misses the extensive economic costs of war, including immediate financial burdens and long-term economic damage. The complexities and costs associated with war make a strong case for a default position of pacifism, where the justification for war must meet a high burden of proof.
We in the West tried this attempt with economic sanctions. However, we have to admit that it was largely a failure. Parallel imports are at a large scale used to circumvent sanctions. Also, the case can be made that the idea of cumulative sanctions (as we did in the West against Russia) is not working: Sanctions cause a harsh shock, followed by an asymptotic recovery. If the initial shock does not cause a total collapse (as was the case in Venezuela in 2017), the effect gradually diminishes over time due to adjustments, and the pressure can only be maintained by imposing new sanctions. That is what we see in Russia.
Nevertheless, this does not imply that we should allow aggressors free rein or withhold support from Ukraine. If, through democratic decision, action is deemed necessary, then it must be taken. However, we must carefully consider the long-term costs and identify the most effective means of standing up to aggressors, without precipitating an arms race.
Thus, we may indeed need to consider adjustments in military spending. This raises several questions: What are the costs involved? What sacrifices are required? Are we fully transparent about these issues?
I believe we often overlook the economic costs of warfare. There is scarcely any discussion on this subject. To phrase it differently, we tend to obscure these costs through statistical manipulation and also in the manner we finance the war.
This tunnel vision of warfare distracts us from well-being, which means regression instead of progression for humanity. Throwing weapon after weapon has never led to a better world. I think many miss that part of the puzzle.
The statistical artefact relates to a historical discussion about what should be calculated as economic growth in the 30s of the previous century. Simon Kuznets, one of the bright people working on the foundations of macroeconomic bookkeeping that resulted in what we currently know as Gross Domestic Product and economic growth, opposed to putting military spending into economic growth:
“It would be of great value to have national income estimates that would remove from the total the elements which, from the standpoint of more enlightened social philosophy than that of an acquisitive society represent dis-service than service. Such estimates would subtract from the present national income totals all expenses on armament, most of the outlays on advertisement, a great many of the expenses involved in financial and speculative activities, and what is perhaps most important, the outlays that have been made necessary in order to overcome difficulties that are, properly speaking, costs implicit in our economic civilisation”. (Kuznets, cited in Coyle 2014, p. 13-14).
For two reasons, this idea did not make it: (1) it was wartime, and a significant shift of government expenditure went to military spending, so it was impossible to include this, and (2) the difference between valuable and useless production (or repair production) did not make it. GDP turned out not to be a measure of wellbeing but of output.
This is especially relevant nowadays. Military spending is increasing worldwide, and in some countries (like Ukraine), it is more than a third of all economic activity (see below).
When judging GDP developments, we don’t see anything about this increase in military spending in the macroeconomic commentaries. Yes, in terms of headlines, it is discussed that ‘government spending’ supports economic growth, but no commentator seems to be bothered by what kind of economic growth it is. And it is simply not true.
The same holds for the war destruction that is going on. We don’t see it back in GDP figures from lives lost to demolished infrastructure. Hopefully, this will show up as ' economic growth ' only when Ukraine is rebuilt (hopefully, someday). The larger the destruction, the greater the surge in growth. This shows once again that GDP can never be used to proxy well-being. It is about newly produced output.
There can be a cynical, positive point to war spending; it can help transitions. Wars tend to (unfortunately, if they are destructive enough) completely steer societies in a different direction. It is wars that help define the cultural identity of a country, and it is wars that often lead to an acceleration in innovation. For instance, the world wars brought us an economic system built on oil, from combustion engines to plastics. Plastic innovation soared during the Second World War as a substitute for scarce metal and cork —a curious paradox.
Russia finances the current war based on its addiction to raw materials. We have seen some acceleration in the energy transition in Europe. But probably the most innovation goes to AI and drones on the battlefield. We can only judge later if they will result in anything useful for human well-being.
That is related to another, also overseen, relevant point in Europe and European elections. Suppose European governments need to spend more money on military spending (weapons) while they want to adhere to the European rules on prudent fiscal policies. In that case, it does mean it crowds out other spending, especially in this higher interest rate environment: health care, social provisioning, whatever. The indirect sacrifice made by European citizens is less discussed but will be felt. And, indirectly, it can also feed populism, as we are already seeing.
To escape this dilemma, many (European) governments, like the Dutch government, are looking to private and institutional investors to finance the military sector. “They” have the money, and it does not lead immediately to large budget consequences. But leaving the financing of weapons to the market is a bad idea. Private funding boosts the incentive for massive profits and an arms race; in the end, governments still have to pay. In addition to that, together with the innovation that takes place, as a society, we need some control and some say in what is done with new technologies.
We must have a more serious discussion about war, war spending, and what it does to our societies. This discussion is missing. I am afraid that war rhetoric leads to more damage than war itself. A credible threat has to be effective and efficient.
I miss the clear texts of Bruce Springsteen:
War
It ain't nothing but a heartbreaker
War
Friend only to the undertaker
[Verse 3]
War has shattered many young men's dreams
Made them disabled, bitter and mean
Life is too precious to be fighting wars each day
War can't give life, it can only take it away
War, huh (Oh oh yeah)
What is it good for?
Absolutely nothing
Say it again
War, huh (Good God, y'all)
What is it good for?
Absolutely nothingSource: Bruce Springsteen, War (1985), original from the Tempations
We all understand that war is good for nothing. Why can’t we have a discussion, a dialogue in society on progressing from this Barbarian idea?
Statistical artefacts
Maybe it is good to start with Simon Kuznets (and not because he was born and raised in what is now Ukraine, but because he was one of the founders of the System of National Accounts, more or less we still calculate Gross Domestic Product (GDP) nowadays). He had significant hesitations about including defence spending in GDP. Kuznets thought most military spending should be excluded from national income during peacetime. Why? For Kuznets, military spending was an intermediate good, not a final good like wheat or haircuts that directly produced consumer utility. The cost of the scarecrow that keeps the crows from the grain is already included in the price. The military, which scares away our would-be enemies and prevents them from attacking our fields, is also an intermediate good. In World War II, however, Kuznets thought that:
“for the transient period of a major war we might recognize two purposes coequal in primacy: provision of goods to consumers and for war use.”
After the war, Kuznets wanted to return to a peacetime definition of national product that excluded the consumption of war goods. This never occurred, although some economists have still made some attempts.
So, here we are with an increasing share of the global economy spent on weapons. In the graph below, it looks like a little uptick, but it will accelerate in the coming years. Looking back, we can see the large global peace dividend. The decline in military spending since around 1990 has been 1.5% of global GDP - each year.
But okay, leave that musing aside and start with the apparent inability to come to any other solutions. That means: more military spending in the West (as in the East) to
Bad timing: This kind of public stimulus does not help the economy
Some economists would argue that public stimulus would help the economy: was it not that a lot of innovation came from the military-industrial complex in the US in the fifties and sixties? There is also evidence that this has been the case in the US over a long period because it shifts the composition of public spending towards R&D. This boosts innovation and private investment in the medium-term and increases productivity and output at longer horizons.
However, there is more evidence that it does not help economic growth: a significant and persistent negative effect of military burden on economic growth that is robust across different country groups, with the largest impact being for OECD countries.
There are currently (at least) two reasons why extra spending on weapons and military might not help progress at this moment.
The first is that there is, in many Western countries, no need for extra public stimulus given that labour markets are already historically tight (see figure below). In times of underspending, a Keynesian demand-push can be beneficial (although questionable if that demand should be pushed by weapons). But there is no underspending right now. Moreover, extra (fiscal) stimulus will heat up economies once more, making it more difficult to tame inflation.
And that brings me to the inevitable other outcome: extra military spending can at this point in time lead to crowding out of other spending. Historically, this relationship is obvious with regard to health care spending. At this moment, with already elevated debt in many countries, increased interest payments and negative fiscal balances, it is not difficult to predict that increased fiscal spending crowds out other spending (social spending, health care, et cetera).
This could particularly impact the political landscape in Europe, where it presents a significant challenge. As military spending rises, the Stability and Growth Pact mandates additional austerity measures across Europe. This comes at a time when populist parties are gaining traction in many countries ahead of the European elections, potentially complicating the political climate further.
Accelerating transitions?
To have a transition, we need a new (other, better, more sustainable) technology, behavioural change and policies that guide that, to put it simply. Currently, we are muddling through with the energy transition, but we saw that the Russian-Ukriane war increased the transition because of a change in the landscape (different macroeconomic surroundings) and also the willingness (behavioural change) to save energy, together with price pressures and newer and cheaper renewable technologies.
This is, in short, what can also be found in this paper titled "World wars and sociotechnical change in energy, food, and transport: A deep transitions perspective" by Phil Johnstone and Caitriona McLeish. It provides a thorough examination of how the disruptive environments of World War I and World War II acted as catalysts for significant changes in energy, food, and transport systems. Utilizing the "Deep Transitions" framework1, the authors explore the profound, system-wide shifts driven by the necessities of war. These global conflicts accelerated the transition from coal to oil, sparked innovation in food production and distribution to counter shortages, and led to advancements in transportation, including the rapid development of aircraft and motor vehicles. Beyond the immediate technological advancements, the paper discusses the long-lasting impacts these wars had on societal structures and the direction of technological evolution. Delving into these historical transitions highlights the importance of resilience and adaptability in facing modern challenges, particularly those related to sustainability and environmental concerns.
Understanding how societies have navigated past disruptions can provide valuable insights into managing today's global crises, such as climate change. It can also illustrate the lasting influence of wartime innovations on contemporary sociotechnical systems.
It is by no means clear what this time the outcome will be. It is very tempting to speculate that this time the meta-rules of the system would or will change in favour of sustainability outcomes. This is completely unclear if that will be the case. First, although fossil fuels have become more expensive in Europe, this is not the case for other continents, nor on the battlefield. Second, given the still abundance of fossil fuels, technology is more likely the game-changer in this war. This is where we see the most innovation. To put it very simply: innovation is not about electric tanks or rockets with solar panels, but about drones, robots, AI and cyberwarfare. It is to be seen how that will affect human well-being in the years to come.
How to pay for the war?
The European Investment Bank (EIB) approved a plan to mobilise investments amounting to EUR 6 billion by 2027 in support of Europe’s dual-use security and defence systems dual-use indicating the potential for both civilian and military applications.
Just a week later, 14 national governments reportedly sent a letter to the EIB to enhance its financing for defence and to allegedly go beyond dual-use investments despite the EIB’s policy of excluding the funding of any weapons, ammunition, explosives, as well as equipment or infrastructure dedicated to military/police use. Earlier this year, NATO Chair of the Military Committee, Admiral Rob Bauer, called on NATO members and the defence industries to step up their commitments and enter public-private cooperation to meet the military’s needs and prepare for all eventualities.
In the meantime, A Dutch minister is calling on pension funds to invest in weapons.
Evidently, the arms industry is trying to mobilize as much private capital as possible to strengthen its business model, and the government is playing along. The reason for this increased attention and production of weapons is apparent: the war in Ukraine. Rising global tensions and uncertainty over who will win the upcoming U.S. elections also drive Europe's focus on strengthening its defence. Although this may align with public demand for safety, relying on private entities for this funding is strange and incorrect.
A Classic Question
The question of who pays for war is as old as warfare itself. In "How to Pay for the War," John Maynard Keynes outlined how the UK could adjust economically to a conflict with Germany: higher taxes, especially for the wealthy, increased (forced) savings, and a larger deficit on the current account. Historically, short, intense wars have primarily been funded by governments borrowing more. Higher taxes financed the Cold War. It makes sense to fund weaponry through public means. Denmark even cancelled a public holiday last year to support defence spending. A public good like safety, protected by a government with a monopoly on violence, should be publicly funded. While private companies have historically profited from defence spending—the term "military-industrial complex" exists for a reason—no one has suggested that private parties should invest in arms for the public good.
Blind Market Thinking
Frankly, I don't understand the current call for private investment in weaponry. During the lean years of the arms industry, there was never a lack of capital for this sector. In fact, over the past 20 years, revenue for the top 100 publicly traded arms companies has doubled, with considerable profits. The past two years have been especially lucrative for these companies. Record profits attract investors who don't care where their money comes from. Even private equity is thriving in the arms industry.
Yet, this approach is inherently inefficient. Investors have one priority: to make a profit. We need not look far to see the consequences of private parties providing public goods. The excessive profits that pharmaceutical companies and suppliers of COVID-19 aid made during the pandemic serve as an example. Instead of investing in war-related ventures, we should discuss taxing war profits.
The arms industry presents a different challenge compared to pharmaceuticals. While vaccines achieved their purpose and the profits eventually stabilized, it's unlikely that pharmaceutical companies would create new viruses to sustain their profits. However, investors will still expect returns if war becomes less pressing and government orders decrease. The only way to achieve this is by supplying weapons, reinforcing the incentive for an arms race. This would not be the first time.
There's Always Enough Money
The idea that private investors are necessary is based on a widespread misconception: a lack of available resources. This is precisely what governments are for. In democratic nations, we entrust governments not only with the monopoly on violence but also with fiscal policy. If we collectively decide that more weapons are needed for self-defence for future generations, we can borrow to finance that. If we believe it's essential for ourselves now, making a financial sacrifice through taxes or extra work is reasonable. By using public funds for weapon production, we retain maximum control to prevent an arms race or exorbitant profits for the arms industry.
That’s it for this time.
Take care and be nice,
Hans
The Deep Transition framework is a theoretical approach designed to analyze significant, long-term transformations across multiple societal systems. It focuses on the historical shifts in technologies, practices, and institutions over extensive periods. The framework examines changes at different levels—from niche innovations to broader systemic shifts—and emphasizes the interconnectedness of technological, economic, political, and cultural domains. It is particularly useful in studying sustainability transitions, helping researchers and policymakers understand and guide societal change toward more sustainable practices. See for instance Schot and Kanger