I had an argument about the (economic) stimulative effect of war the other night. As usual, I was not entirely happy with how I argued my point in real time (which is why I blog). Here is an attempt at an improved, brief answer:
One of the reasons that people often believe that war "improves" the economy is that they are looking at the wrong metrics. They look at unemployment and observe that it falls. They look at capacity utilization and observe that it rises. They look at GDP and see that it rises.
But these are the wrong metrics. What we care about is if people are better off: Can they buy the things they want? Are they wealthier?
These outcomes are hard to measure, so we use unemployment and GDP and capacity utilization as proxies for people's economic well-being. And in most times, these metrics are reasonably correlated with well-being. That is because in a free economy individuals and their choices guide the flow of resources, which are dedicated to improving what people consider to be their own well-being. More resources, more well-being.
But in war time, all this gets changed. Government intervenes with a very heavy hand to shift a vast amount of the resources from satisfying people's well-being to blowing other people up. Now, I need to take an aside on well-being in this context. Certainly it is possible that I am better off poor in a world with no Nazis than rich in one dominated by Nazis. But I am going to leave war aims out of the concept of well-being. This is appropriate, because when people argue that war stimulates the economy, they are talking purely about economic activity and benefits, and so will I.
What we find is that in war time, unemployment is down, but in part because young people have been drafted (a form of servitude) to fight and die. Are they better off so employed? Those who are left find themselves with jobs in factories with admittedly high capacity utilization, but building things that make no one better off (and many people worse off). GDP skyrockets as government goes deeply in debt to pay for bombs and rockets and tanks. This debt builds nothing for the future -- future generations are left with debt and no wealth to show for it, like taking out a mortgage to buy a house and then having the house burn down uninsured. This is no more economically useful than borrowing money and then burning it. In fact, burning it would have been better, economically, as each dollar we borrowed in WWII had a "multiplier" effect in that it destroyed another dollar of European or Asian civilian infrastructure.
Sure, during WWII, everyone in the US had a job, but with war-time restrictions and rationing, these employed people couldn't buy anything. Forget the metrics - in their daily lives Americans lived poorer, giving up driving and even basic staples. This was the same condition Soviet citizens found themselves facing in the 1970s -- they all had jobs, but they could not find anything to buy. Do we consider them to have been well off?
There is one way to prosper from war, but it is a terrible zero-sum game -- making money from other people's wars. The US prospered in 1915 and later 1941 as Britain and France sunk into bankruptcy and despair, sending us the last of their wealth in exchange for material that might help them hang on to their existence. Ditto in 1946, when having bombed Japanese and German infrastructure into the stone age. we provided many of the goods to help rebuild them. But is this really the way we want to prosper? And is this sort of vulture-like prosperity even possible with our inter-woven global supply chains? For example, I can't see a China-Japan war being particularly stimulative for anybody nowadays.