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The Economics of War
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Preface

Introduction

      War fascinates scholars, intrigues the general public, changes lives and shapes history. Yet, as important as it may be to study Lee's tactics at Fredericksburg, or Eisenhower's plans for the D-Day invasion, it can be forgotten that war is also an economic enterprise. "War is a matter not so much of arms as of expenditure, through which arms can be made of service," remarked the ancient Greek war historian Thucydides. "Money," according to the first-century Roman historian Tacitus, "is the sinew of war." More directly, Louis XIV of France believed that "the last guinea will always win." The crux of their statements is simple; throughout history, wars have been fought for money, and money has enabled wars to be fought.
This book offers an introduction to war economics. Though a single topic covered in one of this book's chapters could, by itself, fill an entire book or course, offering such detail is not the intention of this text. Instead, this text has two objectives. First, to enable all those interested in economics, political science, and related social sciences and humanities (both scholars and members of the general public) to understand how economics relates to warfare and national defense. Second, this text seeks to offer instructors of economics a tool by which they can offer exciting real-life applications of core economics concepts.

TEACHING POINTS

      Geared to a wide audience of scholars and students, this book can serve as a stand-alone text or as an outstanding supplement to a variety of economics and political science courses, particularly principles and intermediate economics and international political economy. To bolster the text's pedagogic value, several educational features are provided. First, rather than simply summarizing the main points of a chapter, the final section of the chapter is called the "Key Points" section. This Key Points section specifies which major topics in the chapter are of a microeconomic focus, and which are of a macroeconomic focus. Next, the chapter offers a listing of the key terms found in the chapter. The glossary at the end of the text defines each of these terms. Finally, the section ends with a grouping of material-based and critical-thinking questions. The questions can serve as the basis for exam, homework, or bonus questions.
      To assist instructors and students in matching key economic principles with the lessons of this book, please refer to Table I. It presents a listing of core macro and microeconomic concepts, the sections of the book in which those are addressed, and the defense economic issue used to instruct the concept.

Table I
Core Economic Concepts and Corresponding Defense Concepts

Core Macroeconomic Concept
Book Section
Economic Impact of Disarmament
Disposable Income
3.4
Economic Impact of Disarmament
Inflation (causes, impact, quantity theory of money, equation of exchange)
1.3
Impact of War on Economy
Production Function (National Security Function)
3.5
Economic impact of Arms Races
Crowding Out
3.3 and 3.4
Economic Impact of Disarmament
Phillips Curve
2.3
Financing of Vietnam War
Bond Market
2.2
Financing of World War II
Operation of the Federal Reserve
2.2, 2.3, and 7.6
Financing of World War II; Financing of Vietnam War; response to September 11, 2001 terrorist attacks
Unemployment
1.3
Impact of War on Economy
Gross Domestic Product
1.3
Impact of War on Economy
Macroeconomic Identity [C+I+G+(X-M)]
1.2 and 3.3
Impact of War on Economy, Crowding Out by Government Expenditures
Marginal Propensity to Consume
3.4
Economic Impact of Disarmament
Marginal Propensity to Save
3.4
Economic Impact of Disarmament
Core Microeconomic Concept
Book Section
Defense Concept
Comparative Advantage
4.3 and 8.5
Conscription vs. All-Volunteer Force; Supplying Countries with Nuclear Technology
Dead Weight Loss
5.3 and 5.4
Domestic Arms Market; Global Arms Market
Economies of Scale
5.4
Global Arms Market
Efficiency Wages
4.6
Private Military Contractors
Gains From Trade
8.5
Bartering to Supply Countries with Nuclear Technology
Game Theory
3.5, 7.4, and 8.6
Arms Races, Resorting to Terrorism; Failure of Treaties
Impact of Quotas and Transfer Payments (subsidy) on Supply and Demand
5.4
Global Arms Market
Indifference Curves
3.5 and 7.4
Economic impact of Arms Races; Suicide Bombing
Labor Demand and Labor Supply Curves
4.3
Conscription vs. All-Volunteer Force
Marginal Cost and Marginal Benefit Analysis
4.3 and 6.6
Military Labor Market; Peacekeeping
Marginal Productivity of Labor
4.3
Conscription vs. All-Volunteer Force
Monopoly and Monopsony
5.2 and 5.3
Domestic Arms Market
Opportunity Cost
3.3, 4.3, 6.3 and 8.5
Economic Impact of Disarmament, Conscription vs. All-Volunteer Force; Poverty and Civil War; Supplying Countries with Nuclear Technology
Principal-Agent Model
5.3
Domestic Arms Market
Production Possibilities Frontier
3.3 and 3.5
Economic Impact of Disarmament; Economic impact of Arms Races
Public Goods (free-riding, common resources)
4.6, 6.6, and 8.6
Private Military Contractors; Peacekeeping; Treaties
Supply and Demand Curves
5.3 and 8.5
Domestic Arms Market; Determinates of Nuclear Black Market Price


      Each chapter contains "Historical Perspective" boxes. Though the book is full of historical examples, these boxes use history to offer unique information that can be used in or outside the context of the chapter's text. These perspectives are especially helpful for instructors of economic or military history.
      For ease of understanding, this text makes extensive use of graphs, figures, and tables. Graphical economic analysis is particularly important to students, because it is through graphs that many undergraduates become familiar with economics.
      The book's bibliography contains a section dedicated to those sources that can be accessed, for free, via the web, along with web addresses.

TEXT ORGANIZATION

      This book is divided into three units. Unit I explores the economics of war economies. Unit I seeks to lead students through a determination of whether or not war benefits the economy; and, if not, why not. Chapter 1 presents the economic theory underpinning the Iron Law of War - the idea that fighting wars can provide a boost to an economy (if the war is not fought on that country's soil). This theory will lead to the creation of a four-point scheme for evaluating the economic impact of war. Chapter 2 applies this scheme to a variety of major American wars from the 20th century and today. The evidence that these case studies present indicate that the Iron Law of War, though valid in the past, does not hold today. These case studies also bring out the two reasons why wars no longer induce the same strong, positive economic response of early 20th century wars: the existence of a permanent military industry and the nature of modern warfare.
      Unit II explores the fact that because the United States is continually maintaining a military establishment, the onset of a war no longer induces massive mobilization and drastic increases in government expenditures. Prior to World War I, the U.S. government only incurred military expenditures at times of war. Today, military spending is the single largest discretionary (i.e., adjustable) expenditure of the U.S. government during times of war and peace. Today governments maintain high levels of military expenditures even during times of peace. As such, modern war does not offer a large and sustained boost in government expenditures and mobilization of resources. Chapter 3 details the level of military expenditures in the United States and around the world, the economic implications of military spending, and the reasons why countries will maintain such high levels of military expenditure. Chapters 4 and 5 look in-depth at what exactly is purchased with these expenditures, in both personnel and equipment. Chapter 4 surveys the economics of recruiting and training military personnel, while Chapter 5 looks into weapon systems procurement.
      Unit III focuses on another reason why wars now lack the ability to boost an economy's performance - the unique and limited nature of modern warfare. At the close of the Cold War, political scientist John Mueller wrote, "From a rational perspective then, war among developed states seems to have become unthinkable - rejected because it's unwise [given the presence of nuclear weapons], a thoroughly bad and repulsive idea." Though Mueller's thesis focuses primarily on the existence of nuclear weapons, he and others recognize that increasing economic interdependence through trade and financial flaws have also contributed to war's irrationality: "Why would we [the U.S.] go to war with China? We would have to close all the Wal-Marts." However, nuclear weapons and economic interdependence did not bring about the cessation of war.
      As instances of international war have declined, many developing countries have more frequently succumbed to civil war. In turn, if these countries' central governments can no longer provide public goods and services, enforce the rule of law, and/or hold ultimate sovereignty, these countries can prove fertile grounds for housing terrorist organizations that have a global reach. The industrialized world has responded in two ways, by stabilizing failed states through peacekeeping operations, and by neutralizing terrorist organizations through cutting off their funding. Even still, a greater potential threat remains - the proliferation of weapons of mass destruction. Though the probability of a chemical, biological, and nuclear attack is smaller than a terrorist strike, the great destructive power of these methods makes imperative that developed countries seek to prevent such weapons from falling into the hands of terrorists, or states with a low threshold for deploying such weapons.
      Chapter 6 considers the economic causes and consequences of civil conflict in the less developed world and the use of peacekeeping operations as a response to such conflicts. Chapter 7 uses economics to analyze terrorism's existence, impact, and prevention. Chapter 8 concludes the unit by outlining the economic costs and motivations faced by countries that wish to develop and proliferate weapons of mass destruction, particularly nuclear weapons.

ACKNOWLEDGEMENTS

      Many individuals offered help and encouragement during the writing of this text. First, I must thank my wife, Julie. It was through her ideas and encouragement that I came to write this book. Second, I would like to thank my editor at McGraw-Hill, Lucille Sutton, my McGraw-Hill Marketing Manager, Martin Quinn, and my personal editor, Jan Hall. Third, there were numerous scholars who read and offered suggestions on portions of this text. They are:

William Bowman, United States Naval Academy
Molly Cooper, Ohio State University
Geoffrey Forden, Massachusetts Institute of Technology
David Hineline, Miami University
Anke Hoeffler, Oxford University
Vasilios Koesteas, Cleveland State University
Alexander Montgomery, Harvard University
John Mueller, Ohio State University
Gene Mumy, Ohio State University
Lt. Col. Daniel Olexio, Defense Geospatial-Intelligence School
Cindy Williams, Massachusetts Institute of Technology
Ronald Wintrobe, University of Western Ontario

Finally, I must thank the men and women who have, are, and will serve in the United States Armed Forces. It is to them that this book is dedicated.

Paul Poast