Wars Are Not Good For The Economy

1893 words - 8 pages

One of the more enduring myths in Western society is that wars are somehow good for the economy. Many people see a great deal of evidence to support this myth, after all World War II came directly after the Great Depression. This faulty belief stems from a misunderstanding of the economic way of thinking.

The standard "a war gives the economy a boost" argument goes as follows: Let's suppose that the economy is in the low end of the business cycle, so we're in a recession or just a period of low economic growth. The unemployment rate is high, people may be making less purchases than they were a year or two ago, and overall output is flat. But then the country decides to prepare for war! The government needs to equip its soldiers with the extra gear and munitions needed in order to win the war.

Corporations win contracts to supply boots, and bombs and vehicles to the army. Many of these companies will have to hire extra workers in order to meet this increased production. If the preparations for war are large enough, large numbers of workers will be hired reducing the unemployment rate. Other workers may need to be hired to cover reservists in private sector jobs who get sent overseas. With the unemployment rate down we have more people spending again and people who had jobs before will be less worried about losing their job in the future so they'll spend more than they did. This extra spending will help the retail sector, who will need to hire extra employees causing unemployment to drop even further. A spiral of positive economic activity is created by the government preparing for war, if you believe the story. The flawed logic of the story is an example of something economists call The Broken Window Fallacy.

The Broken Window Fallacy is brilliantly illustrated in Henry Hazlitt's Economics in one Lesson. The book is still as useful today as it was when it was first published in 1946, I give it my highest recommendation. In it, Hazlitt gives the example of a vandal throwing a brick through a shopkeeper's window. The shopkeeper will have to purchase a new window from a glass shop for a sum of money, say $250. A crowd of people who see the broken window decide that the broken window may have positive benefits:

After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles.

The logical conclusion from all this would be ... that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor. (p. 23 - Hazlitt)

The crowd is correct in realizing that the local glass shop will benefit from this act of vandalism. They have not considered, however, what the shopkeeper would have spent the $250 on something else if...

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