26 November 2012
War: Effect on Economy
War has influenced economic history profoundly across time and space. Winners of wars have shaped economic institutions and trade patterns. Wars have influenced technological developments. Above all, recurring war has drained wealth, disrupted markets, and depressed economical growth. Wars are expensive (in money and other resources), destructive (of capital and human capital), and disruptive (of trade, resource availability, labor management). Large wars make up severe shocks to the economies of participating countries. Despite some positive aspects of short-term stimulation and long-term destruction and rebuilding, war generally impedes economic development and undermines wealth. Several specific economic effects of war recur across historical eras and locales. Next inflation, the most consistent short-term economic effect of war is to push up prices, and consequently to reduce living standards. This war-induced inflation was described in ancient China by the strategist Sun Tzu: "Where the army is, prices are high; when prices raise the wealth of the people is exhausted" (Tzu Sun, c.400 BCE) His advice was to keep wars short and have the money in hand before assembling an army. Paying for wars is a central problem for states (see War Finance). This was especially true in early modern Europe (fifteenth to eighteenth centuries), when war relied heavily on mercenary forces. The king of Spain was advised that waging war required three things - money, money, and more money. Spain and Portugal imported silver and gold from America to pay for armies, but in such large quantities that the value of these metals eventually eroded. One way governments pay for war is to raise taxes (which in turn reduces civilian spending and investment). U.S. revolutionary Thomas Paine warned in 1787 that "war ... has but one thing certain, and that is to increase taxes." Another way to pay for war...