The Economics of War

Indo-Pakistan War (1947).

Sino-Indian War (1962).

Indo-Pakistan War (1965).

Sino-Indian War (1967).

Indo-Pakistan War (aka Bangladesh Liberation War, 1971).

Kargil War (1999).

Listed above are some of the major wars India has engaged in with its neighbours. What haven’t been included are the various internal conflicts and ongoing insurgencies that plague our country that keep the Indian military defence busy. From Kashmir, to the North-East, to the Maoists of central India—threats to India are both internal and external.

While the recent surgical attacks were lauded by everyone in the mainstream media, what completely got lost in the TRP driven chaos and war-mongering was the fact that the Sensex dropped 500 points.

Under normal circumstances, that would be a news to worry about. But, who cares about the Sensex when the mainstream television channels are busy trying to up their TRPs with cries of war. From banning artists, to call for revenge – the coverage was filled with nationalistic debates and took away from the extremely worrying aspect, that this was a major crisis for a government that has been trying to woo foreign investors and economic growth ever since it was voted to power in 2014.

When all the nationalistic sentiments around pride, patriotism and war have died down, it’s worth looking at the economic impacts of war that the higher ups might be looking at.

For the government, it’s business as usual. A rare show of strength and calmness, while resolutely pursuing the diplomatic route and not engaging in talks of full-fledged, all-out war.

So why is war still considered good business? Why is there such mixed response around the complexities of war?

To start with, war is never a good idea. To put it simplistically, a lot of people die, a lot of money which can otherwise be used for development is used up in defending borders and ideologies. But, let’s break it down a little more. 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.

Hazlitt, in his book, gives the example of a vandal throwing a brick at a shopkeeper’s window. Let us illustrate this example. The shopkeeper’s window is ruined by the vandal. He now has to spend INR 10,000 to replace the window. The crowd gathered around starts analysing the situation and talk about how great it is that the window has broken. What would happen to the glass industry, if it weren’t for broken glasses? What would happen to all the other industries the glass manufacturer buys from to make the glass? The smashed window in some way becomes a reason to provide money and employment. The vandal then suddenly becomes not a menace, but a benefactor.

They are right in some ways. But, couldn’t the shopkeeper have spent the INR 10,000 on something else if his glass wasn’t broken? Maybe he was saving it for a new equipment or a vacation or new clothes. The gain of the glass manufacturing store is the loss of many other stores. So, in some ways, there is no net gain, but a decline in economy.

This is enduring because we have difficulty in seeing what the shopkeeper would have done with the INR 10,000. We only see the gain of the glass manufacturer, but not the resulting loss.

It is quite clear from the above example how a war does not really benefit the economy. Money spent on war is money that is not being spent elsewhere, like in education, infrastructure, housing or agriculture.

How is a war funded then? Through a combination of increased taxes, decreasing spending in other areas and increasing debt.

Increasing taxes means less money for you to spend on things, which means a vacation not taken, a dress not bought or a property not invested in. Spending in other areas means spending on buying military equipment, weapons and other necessities to support the war. So schools, hospitals will take a back-seat and the community will suffer in the long run. Increasing debt means higher borrowing, which means a gain is not a great idea.

So whom does a war really benefit if not the countries involved? The suppliers of military equipment and weapon dealers. The war-mongering channels looking for the next big story to drive channel ratings and revenues.

The citizens? No. We don’t really stand to gain anything. We lose more than anyone else when there is a war – be it our jobs, our money, our future or even our lives.

Peace and stronger economic policies on the other hand, benefit all.