What are the economics of war?

Summary

The script discusses the resurgence of armed conflicts and increased military spending, exemplified by France's and Germany's ramped-up production of ammunition and military equipment. It delves into the economic implications of war, illustrating the trade-off between defense spending and social programs, and the potential economic burdens such as inflation and workforce depletion. The script also touches on the financing methods for war, including taxation, borrowing, and money printing, and their consequences like inflation. It contrasts the short-term economic boosts with the long-term societal losses, questioning the sustainability of war economies.

Takeaways

• 📈 Global military expenditure reached a peak of $2.4 trillion in 2023, marking the highest year-on-year rise since 2009.
• 🏭 Countries like France and Germany are increasing domestic production of military equipment to support their armed forces.
• 💥 The defense of Ukrainian territory since Russia's war in 2022 has been critical in driving the demand for ammunition.
• 🌍 The trend of increasing military production is not limited to France but is also observed across Europe.
• 💰 The economics of war often dictate the causes, outcomes, and post-war recovery of nations.
• 🔄 The redirection of resources towards defense during war economies involves significant opportunity costs, often described as 'guns vs butter'.
• 💸 The cost of war is immense, with one Javelin anti-tank missile costing about $178,000 and the global economic cost of conflict reaching $17.5 trillion in 2022.
• 📉 War economies can lead to increased state control over the economy, labor, and resource allocation, potentially reducing economic output.
• 📈 Wars can initially boost the economy with low unemployment and large industry investments but often result in price hikes and inflation.
• 💵 States finance war through taxation, borrowing, and printing money, which can lead to economic instability and hyperinflation.
• 🚀 Wars can stimulate technological innovation and benefit certain companies, especially those in the defense sector.

Q & A

What was the peak amount of global military expenditure in 2023?

The peak amount of global military expenditure in 2023 was $2.4 trillion.

What significant event took place at an ammunition factory in the south of France on April 11, 2024?

On April 11, 2024, Emmanuel Macron opened a new production line at an ammunition factory in the south of France.

What are the explosive powders mentioned in the script used for?

The explosive powders mentioned are used in weapons, specifically in howitzer rounds critical for the defense of Ukrainian territory since the start of Russia's war in 2022.

What is the French government's strategy for increasing military equipment production?

The French government is ramping up production of military equipment, including propulsion systems, electronic equipment, and rubber tires, to fill depleted supplies, support high technology development, and create new jobs.

Which European countries have opened new factories for military production in 2024?

In 2024, France, Germany, and Norway opened new factories for military production. In Germany, Rheinmetall inaugurated a new factory, and in Norway, Kongsberg opened a new anti-ship and cruise missile manufacturing plant.

What does the term 'war economy' refer to?

A war economy refers to a state where resources and supply chains are redirected towards defense priorities, often involving a greater state control over labor, production, and the reallocation of resources.

How does the economic model of 'guns vs butter' illustrate the trade-off in spending between national defense and social programs?

The 'guns vs butter' economic model illustrates the trade-off by showing that producing more guns (national defense) means making less butter (social programs), and vice versa, indicating a balance between military spending and social welfare.

What is the economic cost of conflict and violence estimated by the UN Office for the Coordination of Humanitarian Affairs in 2018?

In 2018, the UN Office for the Coordination of Humanitarian Affairs estimated the total economic cost of conflict and violence to be $14.3 trillion, or 12.6% of global GDP.

How does a war economy impact the workforce and economic output?

A war economy can reduce the size of the available workforce due to conscription, which in turn weakens the economic output as fewer workers are available to fulfill demands for goods and services.

What are the three ways states can finance war according to the script?

States can finance war through taxation, borrowing, and printing money.

What is the 'broken window fallacy' as mentioned in the script, and how does it relate to war economies?

The 'broken window fallacy' is the concept that while repairing a window may seem to generate economic activity, the resources used could have been used elsewhere for more productive purposes. In the context of war economies, it suggests that the destruction caused by war leads to a net loss for society, despite any immediate economic activity it may generate.

Outlines

00:00

📈 Rising Military Expenditure and War Economy

The video script discusses the resurgence of armed conflicts and the subsequent increase in military expenditure, reaching a peak of $2.4 trillion in 2023. It highlights the opening of a new ammunition factory in France by Emmanuel Macron, emphasizing the production of explosive powders critical for defense, particularly in the context of the Ukraine-Russia war since 2022. The script also touches on the broader trend across Europe, with countries like Germany and Norway increasing production of military equipment. The economic implications of a war economy are explored, including the concept of opportunity cost, the trade-off between defense spending and social programs, and the historical example of the Acre war between Brazil and Bolivia. The script outlines the economic burden of war, with figures like the cost of Javelin anti-tank missiles sent to Ukraine and the global economic cost of conflict estimated by the UN. It also discusses the impact on the economy, including state control over resources, labor, and production, as well as the potential for price hikes and a shadow economy in war-torn regions.

05:00

💵 Financing War: Taxation, Borrowing, and Inflation

This section of the script delves into how governments finance wars, primarily through taxation, borrowing, and printing money. It mentions a recent tax hike in Russia to fund the war on Ukraine and provides historical examples, such as Nazi Germany's compulsory loans during its occupation of Greece. The script also discusses the economic impact of war, suggesting that countries involved in wars away from home may not suffer significant economic effects and may even benefit from technological innovation spurred by war. It provides examples of companies like Renault and IBM that profited significantly from the wars they were involved in. The narrative also touches on the 'broken window fallacy' to illustrate that while war may create economic activity, it ultimately leads to a net loss for society due to the resources that could have been used more productively.

Keywords

💡Armed Conflicts

Armed conflicts refer to disputes between nations or groups that involve the use of military force. In the context of the video, the rise in armed conflicts is highlighted by the increase in military expenditure, indicating a global trend towards prioritizing defense capabilities. The script mentions the opening of new production lines for ammunition, suggesting that countries are preparing for potential escalations in these conflicts.

💡Military Expenditure

Military expenditure is the financial allocation by governments to fund their armed forces and defense capabilities. The video emphasizes the peak of $2.4 trillion spent in 2023, marking the highest year-on-year rise since 2009. This figure underscores the economic commitment nations are making to military strength, which can impact their budgets for social programs and other sectors.

💡Explosive Powders

Explosive powders are substances used in the manufacture of munitions and explosives for weapons. The script discusses how these powders are critical in the production of howitzer rounds, which have been essential in the defense of Ukrainian territory since the start of Russia’s war in 2022. This highlights the material basis of modern warfare and the specific components that enable military operations.

💡War Economy

A war economy is an economic system where a nation prioritizes the allocation of resources towards the production of military goods and services. The video explains that this often involves a redirection of resources away from consumer goods, which can lead to shortages and increased prices for civilian products. The concept is illustrated by the French government's move to ramp up production of military equipment, indicating a shift towards a war economy.

💡Opportunity-Cost

Opportunity-cost is an economic concept that refers to the potential benefit an individual, investor, or business misses out on when choosing one alternative over another. In the video, the 'guns vs butter' analogy is used to illustrate the trade-off between spending on military (guns) versus social programs (butter). This concept is crucial in understanding the economic implications of a war economy, where resources are diverted from civilian to military use.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The video mentions that printing money to fund wars can lead to inflation, and in extreme cases, hyperinflation, as illustrated by the example of Germany after World War I, where currency lost value rapidly, affecting the economy severely.

💡Shadow Economy

The shadow economy refers to economic activities that are not officially recorded, such as black markets and illegal trade. The video uses the example of Yemen to show how war can lead to the rise of a shadow economy, where essential goods are sold at inflated prices outside of official channels. This concept is important for understanding the broader economic disruption caused by war.

💡Defense Companies

Defense companies are businesses that produce military equipment and technologies. The video discusses how these companies can benefit from war economies, as seen with the increase in share prices of Europe’s biggest defense companies following an attack on Israel. This highlights the potential for profit in industries that supply the needs of militaries during conflicts.

💡Economic Sanctions

Economic sanctions are measures imposed on countries to inflict economic pressure, often as a response to undesirable actions. The video mentions international sanctions on Russia following its invasion of Ukraine, which is an example of how the global community can use economic means to influence the behavior of nations involved in conflicts.

💡Broken Window Fallacy

The broken window fallacy is an economic concept that suggests that the act of destruction can create economic benefits, such as job creation in repair services. The video refutes this idea by arguing that the resources used for repairing damage could have been better utilized elsewhere, leading to a net loss for society. This concept is used to critique the notion that war can be economically beneficial.

💡Technological Innovation

Technological innovation refers to the development of new or improved products and processes. The video notes that wars have historically driven innovation, from gunpowder to modern technologies like radar and lasers. This concept is important for understanding the dual-edged impact of war, as it can both cause destruction and stimulate advancements that can benefit society in the long term.

Highlights

Armed conflicts are on the rise after twenty years of relative peace.

Military expenditure reached a peak of $2.4 trillion in 2023.

Emmanuel Macron opened a new production line at an ammunition factory in France.

Howitzer rounds have been critical in the defense of Ukrainian territory since the start of Russia’s war in 2022.

The French government is ramping up production of military equipment.

Germany's Rheinmetall inaugurated a new factory for artillery ammunition and explosives in 2024.

Kongsberg opened a new missile manufacturing plant in Norway in 2024.

Economics often determine what leads to a war, who wins, and how countries function post-war.

The Acre war between Brazil and Bolivia was driven by the economic potential of rubber trees.

War economies require states to redirect resources and supply chains towards defense priorities.

The opportunity-cost guns vs butter analogy illustrates the trade-off between defense and social spending.

The economic cost of conflict and violence reached $17.5 trillion in 2022, or more than 17% of GDP.

States may turn to a centrally planned economy to cover war costs.

Wars can lead to a decrease in the available workforce, weakening economic output.

Wars often lead to price hikes and the development of shadow economies.

States finance war through taxation, borrowing, and printing money.

Inflation, and sometimes hyperinflation, can result from printing money to fund wars.

Countries involved in wars away from home may not see significant economic impact.

Wars often lead to technological innovation.

Defense companies can thrive during conflicts, with stocks and bonds known as 'war babies'.

Economic growth during war can be likened to the broken window fallacy, suggesting a net loss for society.

Transcripts

This chart shows that after  twenty years of relative peace,  

armed conflicts are once again on the rise.

And countries are investing in their armed  forces again, with military expenditure  

reaching a peak of $2.4 trillion in 2023,  the highest year-on-year rise since 2009.

On April 11, 2024, Emmanuel Macron opened a new  

production line at an ammunition  factory in the south of France.

The powders he’s talking about are  explosive powders, used in these weapons,  

which were previously made  in countries like Sweden.

These howitzer rounds have been critical in the  

defence of Ukrainian territory since  the start of Russia’s war in 2022.

This relocation is part of a bigger move by  the French government to ramp up production  

of military equipment, including propulsion  systems, electronic equipment and rubber tires.

The government says the financial  investment is aimed at filling  

depleted supplies, supporting high technology  development, and the creation of new jobs.

And that’s the case across Europe.

In Germany, arms maker Rheinmetall  inaugurated a new factory in February  

of 2024, that will produce artillery  ammunition, explosives and rockets.

Aerospace and defense company Kongsberg  also opened a new anti-ship and cruise  

missile manufacturing plant  in Norway the same year.

But what does it mean to be in a war  economy, and what are the economics of war?

When you think of war, the first images  that come to mind are likely to be these:  

the impact war has on human life, and rightly so.

But economics often determine what leads to a war,  

who wins the war and how countries  function in the aftermath.

Take the Acre war, for example, a border conflict  

which broke out between Brazil and  Bolivia in the late 19th century.

The Acre Region was rich in rubber  trees, and as production of bicycles,  

cars and other means of transport ramped up,  

the latex cultivated and produced from the  trees promised wealth to whoever controlled it.

Bolivia would go on to cede the territory  to Brazil after four years of bloodshed.

When deciding to pivot towards a war  economy, states must redirect resources,  

and supply chains towards defense priorities.

A common way to look at it is through the  opportunity-cost guns vs butter analogy.

The economic model describes the trade-off  

in spending between national  defense and social programs.

The curve illustrates how producing more guns  means making less butter, and vice versa.

And it’s a massive trade-off when you  consider just how expensive war is.

One Javelin anti-tank  missile costs about $178,000.

Since 2020, at least 10,000 of these  missiles have sent to Ukraine by the  

U.S. alone - an expense of at least $1.7 billion.

The UN Office for the Coordination of  Humanitarian Affairs estimated in 2018  

that the total economic cost of conflict and  violence in the world reached

$14.3 trillion, or 12.6% of global GDP.

This figure rose to $17.5 trillion in 2022, or more than 17% of GDP.

To cover these costs, the state  plays a bigger role in the economy,  

moving closer to what’s called  a centrally planned economy.

This means a greater involvement in controlling  

labour, production and the  reallocation of resources.

With the need to grow their troops,  governments either turn to voluntary  

enlistment or conscription, a compulsory  enlistment of people in the military.

But this in turn reduces the  size of available workforce,  

which weakens the economic output as a result.

In the short-term, a war may appear  to have a positive economic impact,  

thanks to low unemployment and big investments in  large industries, like transport and technologies.

But as soon as a state turns to a war economy,  

with the high costs for weapons and  defense, and the depletion of workers  

unable to fulfil the demands for food  and other items, prices start to rise.

Warfare invariably leads to price hikes.

Often, price hikes may also cause a shadow economy  with items being bought and sold underground.

Take for instance, Yemen, which  has been at war since 2014. 

The sale of many everyday items is  controlled by criminal networks.

And there are reports of critical commodities  

like petrol being sold on the street in  small containers at an inflated price.

There are three ways for states to finance  war: taxation, borrowing and printing money.

Known as tributum in Ancient Rome, tax  increases to support war are still common today.

In June 2024, Russian President Vladimir  Putin announced the biggest tax hike in  

almost 25 years to fund his war on Ukraine.

But governments also resort to borrowing,  with compulsory or voluntary loans.

For example, when Nazi Germany occupied Greece,  

it forced the Greek national bank to issue  a 476 million Reichsmarks compulsory loan,  

effectively used to cover the cost of  its occupation and military expenditure.

Voluntary loans, or government bonds, are  raised from the public, banks or foreign loans.

Finally, states can fund their war efforts by  printing money.

But printing money can result in inflation, and sometimes even hyperinflation.

Look at this picture from 1923.

A German woman is about to light  a fire in her stove with marks,  

the German currency after the First World War.

At that time, starting a fire with millions  of marks was cheaper than burning wood.

In January 1923, a loaf of bread cost about  250 marks. But by November of the same year,  

it had jumped to 200 trillion marks.

But are all wars bad for the economy? That depends on where the war is fought.

An analysis of nearly 400 wars fought in  the past two centuries found that countries  

involved in wars away from home may not see  any significant impact to their economies.

Wars also often lead to breakthroughs  in technological innovation,  

from gunpowder to longbows,  submarines, radars and lasers.

While public money is the main catalyst  for developing new military products,  

the companies producing the  goods are large beneficiaries.

The two world wars saw French car company Renault  

and the American firm IBM reap  the rewards of the war economy.

The car manufacturer reoriented  its production to trucks, tanks,  

plane engines and ammunitions,  and as a result saw its revenue  

quadruple from 54 million francs in  1914 to 249 million francs in 1919.

Twenty years later during World War II,  IBM, famous for its data processing systems,  

added rifles, engine parts and  bombsights to its production lines.

Its revenue jumped from $38 million  in 1939 to $138 million in 1945.

But the biggest winners in  wars are defense companies,  

whose stocks and bonds, also called “war  babies”, can thrive when a conflict happens.

In 2023, when Israel was attacked by the  terrorist group Hamas, the share price  

of Europe’s biggest defense companies  jumped several points in just two days.

But is war really that good for business?

Whilst Russia, at war since February 2022,

did see their economy slow following  the invasion of Ukraine, the IMF says  

the country’s GDP should rise 3.2%  in 2024, despite the military burden,  

pressures on the labor market  and international sanctions.

But economists describe this kind of  economic growth as the broken window fallacy.

The concept argues that while repairing a window  may seem to generate economic activity, the people  

and materials used to repair it could have been  used elsewhere for more productive purposes.

The same goes for the destruction coming from  war, ultimately meaning a net loss for society.